Business and Economics
Like other countries that were part of socialist Yugoslavia, Bosnia and Herzegovina’s business is in a transitional phase. Since these countries became independent, their aim has been to privatize and modernize business and to join the EU. However, Bosnia and Herzegovina has not progressed as far as Croatia, Serbia and Montenegro. On the contrary, it is one of Europe’s poorest countries.
Of the two main parts of the country, the Federation of Bosnia and Herzegovina accounts for close to 2/3 of total GDP and the Serbian Republic (Republika Srpska) for about 1/3.
The war and its consequences. The causes of poverty and development problems are mainly found in the civil war in 1992-95. It brought many thousands of casualties, tore up business and destroyed much of the infrastructure. Several million residents fled from home, to other parts of the country or to other countries.
Still, after nearly twenty years, many thousands of internally displaced people have been unable to return home. The move has continued and the country’s population in 2013 was only 86 percent of what it was in the early 1990s.
The war also deepened the contradictions between the three linguistic and cultural categories of Bosnians, Bosnians and Bosnians. After the war, politicians have hardly worked to unite them into a single nation. On the contrary, the Dayton Peace Agreement in 1995 brought about a political and administrative structure that reinforced the differences. The country’s division into two large entities entails a comprehensive division in terms of legislation, business policy, social policy and education policy. In practice, this entails an ineffective duplication, for example, within the infrastructure and difficult barriers to labor mobility and people’s access to social support.
A few years of economic growth. As a poor country with a very limited industry and weak domestic purchasing power, Bosnia and Herzegovina is dependent on foreign trade. During a few years in the mid-1990s, trade increased significantly with a number of countries in the EU, and the country’s GDP grew by close to 6 percent in 2004–08. Well-needed foreign investment enabled modernization of parts of the business sector. In 2008, a Stability and Association Agreement was signed with the EU, a first step towards becoming a candidate country. But the agreement has not been updated, since Bosnia and Herzegovina did not meet the requirements set by the EU in, for example, administrative and judicial reforms.
International dependency and other problems. The global financial crisis hit hard on Bosnia and Herzegovina. In 2009, the country’s GDP fell by 3 percent. The protracted euro crisis that followed led to unstable growth and 2012 saw a decline in GDP, which was then still below the pre-war level. Investment from abroad shrank, as did development aid from the United States, the EU and individual states, and the country faced increasingly difficult economic problems. The current account deficit increased and so did the problems in the state budget. Money is lost in widespread corruption. At the same time, the social safety net of the country’s poorest is being eroded.
The overall guideline for the country’s economic development has been to promote competitive business through privatization. Privatization began in the 1990s, but it has been slow and has also created problems. The new, private owners replaced many of the employees with new technology, workers were laid off and unemployment increased further. Foreign owners misjudged the production possibilities or were not entirely serious. The companies went bankrupt and the state has to re-enter as owner to save employment. Privatization processes were darkened and politicians and officials were suspected of corruption.
A modernization of business is necessary, but capital is not available in the country. It must come from outside, but the outside world is skeptical of what is happening in the country. As economic problems increase, more is heard by nationalist rhetoric and ethical suspicion among politicians within each unit. At demonstrations in 2014, it became clear that there was a great dissatisfaction with privatization, corruption and what was termed political misconduct.
More than half of the country’s land is used for agriculture and livestock management. About 20 percent is arable land and in addition some percent is used for growing grapes and other fruit. About 25 percent is made up of permanent pastures and 43 percent of forest land, while the remainder are lean areas with natural pastures.
The most fertile land is on the hilly lowlands in the northeast, and agriculture is therefore of greater importance in the Serbian Republic (Republika Srpska) than in the Federation of Bosnia and Herzegovina.
Because of the country’s breakdown, it is difficult to calculate the importance of agriculture for GDP and employment across the country. Half of the population lives in the countryside and a large part of them work with arable farming and livestock management. Domestic food production is not enough, however, and food imports have increased every year, especially wheat.
The war hit agriculture very hard. More than half of the farm animals died, buildings, roads and other facilities were largely destroyed and vast areas of land were mined. Food production is still significantly lower than before the war. Above all, grain production is declining. Animal production has increased since the mid-00s, but has not yet reached the pre-war levels. The most important agricultural products in agriculture are milk and other dairy products, maize, chicken meat, plums and other fruits as well as sunflower seeds, peppers and other vegetables.
The vast majority of farms are small family farms, mainly self-catering. The average size is three hectares and the eggs are split into many small ticks. Milk from some cows can make a small income.
Outdated aids and outdated farming practices mean that yields are lower than in almost every other country in the region, and most farmers lack the money and knowledge to improve conditions. However, agriculture receives extensive state aid, especially in the Serbian Republic. Especially livestock breeding is considered to have great development opportunities, since the natural conditions are suitable. In higher-lying areas, sheep farming has a long tradition and it provides both wool and meat and milk.
A modern fish farm has started to emerge, mainly salmon farming.
Forests are a significant natural resource in the country and the forestry and timber industry have traditionally been important parts of the business sector in this part of the Balkan Peninsula.
About 43 percent of the acreage is wooded, most with high, dense populations. Just over three-fifths of these are deciduous forests, especially books that are considered to be of high quality. Oak, ash, walnut, cherry and other fruit trees are also included in the deciduous forest stock. Wood of these types of wood is used for, among other things, furniture and wooden floors, which are important export goods. The coniferous forest is for the most part spruce. More than 80 percent of all forest is owned by the state.
Forests of lower quality are found in parts of the Serbian Republic (Republika Srpska), mainly in the southernmost part of the country. It is long before the forest industry as a whole lives up to the international level in terms of sustainability and harvesting. Certification according to international standards is ongoing, for example FSC for responsible forestry. For an export-oriented timber industry, it is a strength in the international market to be able to show that the raw material has been certified wood.
Illegal logging occurs but to a lesser extent than in the years immediately following the war. Both forestry and the timber industry receive international support for, among other things, developing sustainable forestry and marketing of forest products.
The country has quite a lot of minerals, mainly iron, bauxite and lead. As the area was a Yugoslav state, it accounted for most of the iron ore and bauxite mining in Yugoslavia; Zenica was an important center for the mining and metal industry. The war of the 1990s was devastating for all these activities. The mines were damaged and water filled and factories and infrastructure destroyed. Eventually, mining could be resumed, but production had not yet reached the 1990 level. However, products from the mining and metal industry account for a significant portion of export earnings.
Iron ore is found in two areas, partly in central Bosnia with Vareš and Zenica as the main locations, and in the northwest at Prijedor, where one of the host’s largest mining and steel companies, Luxembourg- based ArcelorMittal SA., Operates open- pit mining in Ljubija. After the war, operations were resumed in 2004 and a second mine was opened in 2009. Three quarters of the ore is transported to the company’s steel mill in Zenica, while the remainder goes to steel mills in the Czech Republic and Poland.
Bauxite was mined before the war in many places in the country’s northwest and easternmost part. After the end of the war, bauxite production started fairly quickly, but the companies that process the raw material have had growing economic problems (see Industry) and bauxite production has dropped since 2007. The company Boksit a. Dead Milici is extracting bauxite in the east, near the border with Serbia.
Manganese ore began to be mined in Bužim in the far northwest in the late 1980s, but the mine was abandoned during the war. After coming into Bulgarian ownership, it was put back into service in the summer of 2013.
In the country’s easternmost part, between Srebrenica and the Serbian border, lead and zinc were mined in several mines before the war. At the beginning of the 2000s, operations were resumed in one of the mines and production has increased every year.
A number of industrial minerals are also extracted, such as salt, lime and gypsum.
The country has large resources on lignite and a good potential for water energy, which can provide opportunities to export electricity. However, all crude oil and natural gas must be imported. In households, firewood still plays an important role as an energy source, especially in rural areas and especially in poor households.
The war in the 1990s meant that both the demand for energy and energy production were greatly reduced. By 2010, total energy consumption had not yet reached the 1990 level, mainly as a result of industry shrinking. By contrast, electricity production had reached pre-war levels.
The country’s two main parts, the Federation of Bosnia and Herzegovina and the Serbian Republic (Republika Srpska), have no common energy strategy. They also act individually in terms of energy decisions in the short term and implementation of decisions made at national level.
The most important energy raw material is lignite, which in 2008 accounted for just over 45 percent of all energy use in the country. The assets are located in different parts of the country and are mostly mined.
Many mines were abandoned during the war, when pumps and other facilities were destroyed, but since the late 1990s some mines have been restored and production has started again and slowly increased. Around 2010, coal production was about 40 percent of the 1990 level. For the most part, the lignite is used to generate electricity. Coal mining is a highly fragmented industry with many units not cooperating. In 2013, lignite was mined in twelve mines. They are found in the Tuzla area in the northeast, in central Bosnia as well as in Ugljevik and Gacko.
Business operations are limited by shortcomings in transport networks and other infrastructure and by capital shortages. There is no means to make the operations less environmentally polluting and to clean up old and old mines. Furthermore, many mines still have outdated equipment.
Oil accounts for about one fifth of energy production and is used primarily in the industrial and transport sectors. Crude oil is imported via a pipeline from an oil terminal at Rijeka in northwestern Croatia. Bosnia and Herzegovina’s only major oil refinery is located in Bosanski Brod on the Sava border in the north. From there comes most of the refined oil products needed in the country. The refinery became unusable during the war but was partially used for short periods up to 2005. In 2007 it was purchased by Russian JSC Zarubezhneft, who gradually reconstructed it and in 2009 also started a smaller refinery in Modriča, in the northeastern part of the Serbian Republic, for the production of motor oils. In addition, JSC Zarubezhneft has a long-standing concession for test drilling for oil and natural gas near the Croatian border in the north.
Natural gas accounts for 8 percent of energy production. It is transported under the guidance of Russian Siberia via Ukraine, Hungary and Serbia. Gas is seen as a good future energy alternative for industrial companies. However, this makes the business sector vulnerable, since that energy raw material comes via a single line from a single supplier. When the Russian exporter Gazprom in 2011 raised the gas price very sharply, Bosnian companies were threatened by bankruptcy.
More than half of the electricity comes from the four coal-fired power plants located in each of the coal fields. The residue is generated in 14 rather small hydroelectric power stations. Bosnia and Herzegovina ranks eighth in Europe in terms of expanded water energy, but less than half the capacity is currently used. Much was damaged or destroyed during the war and there was no capital to fully resume operations.
Bosnia and Herzegovina is the country in the Balkan Peninsula that has the greatest potential in terms of renewable energy. Wind and solar energy can be utilized in areas in the west and geothermal energy in the north. A large part of the country’s area is wooded and firewood is the most important energy source for more than half of households. Wood and other biomass should account for one fifth of total energy use in the country.
Industry and service
In 2011, industry, including mining and construction, accounted for 21 percent of employment. Compared to neighboring countries Serbia and Croatia, Bosnia and Herzegovina is a country with very little manufacturing industry. It employs only 6 percent of everyone in the labor market. Particularly low is industrialization in the Serbian Republic (Republika Srpska). The two main parts of the Bosnia and Herzegovina and Serbian Republic ferries have their industrial policies, and state ownership means that either of the two owns the company in question.
During the Yugoslav era, the most important industries were the wood, metal, weapons and textile industries. After the country became independent, business would be privatized, but all the problems created by the war made it delayed. Several large, stale companies have not yet managed to get a stable business under private ownership or with private and state co-ownership. Small, private companies now account for a large part of production.
At the turn of the 2000s, industrial production was at a very low level. Thereafter, up to 2008, production growth averaged 8 percent per year. The stimulus was mainly foreign demand. However, this meant that the ensuing global economic crisis hit hard on the country’s business and industrial production decreased by 15 percent in 2009. Since then, development has been volatile.
Declining demand in the EU has caused problems mainly for the aluminum industry and has led to reduced production in almost the entire metal industry. At the same time, some industrial sectors have attracted foreign direct investment. In particular, the automotive industry has experienced strong annual growth in the early 10s.
The metal industry is the industry that has traditionally been of the greatest importance to the economy of Bosnia and Herzegovina. These include some of the country’s largest companies, which manufacture aluminum, steel and steel alloys and semi-finished products, such as pipes and profiles. The industry is highly export-oriented and therefore dependent on how demand and metal prices change in the world market. The metal industry uses a lot of energy in the form of imported Russian natural gas. These large companies were previously completely state-owned. They were privatized in whole or in part after the turn of the century.
The aluminum industry was hit hard by the global crisis in 2009. The two smelters have since then had great difficulties in maintaining stable production. The Birač aluminum plant in Zvornik near the border with Serbia normally had more than 1,000 employees. Low world market prices, poor corporate governance and sharply rising gas prices led to bankruptcy of the Lithuanian majority owner in the summer of 2013, after which the state, that is the Serbian Republic, completely took over the company. Similar problems hit the aluminum smelter in Mostar. The facilities were closed for economic reasons in the fall of 2013. The state, that is, the Federation of Bosnia and Herzegovina, took over all ownership to sustain life in operations that are of great importance to the country’s business. The company has been the largest exporter and in addition provided many domestic small companies with aluminum for further processing. In both cases, it was also about saving employment in the country, where unemployment was already very high.
The steel industryon the other, has had a positive development since the crisis year 2009. The iron and steel industry has a long tradition in the central parts of the country, which was one of Yugoslavia’s most important areas for ironmaking and weapons manufacturing. Most of it was destroyed during the war, both mines and ironworks in Vareš and the steel mill in Zenica. ArcelorMittal Zenica became majority owner in 2008, renovating the old facilities and gradually expanding its operations. Several attempts have been made to restore the two ironworks in Vareš, but very little remains of all the iron industry in that city. In Jajce in the central part of the country, before the war, there was a smelting plant which produced the alloy metal ferro silicon. After dividing companies and several changes of ownership, they try to regain their lives. The metal industry has created major environmental problems,
The timber and furniture industry has long been significant and in the 2010s, exports of wood products increased every year. Its share of GDP has decreased to just over 3 percent, but it provides 10-20 percent of all export income. It is an industry that attracts foreign investors. The workforce is knowledgeable and the wage situation is low, and there are also a number of high quality native woods. The timber industry has a broad focus. Here furniture, floors, doors and prefabricated houses are manufactured as well as plywood, pulp and paper. Exports of wood products are mainly to countries within the EU and the furniture industry has found new markets in the major countries of Western Europe. Like other industries, the timber industry is in great need of foreign capital to modernize its production.
The textile, clothing and leather industry is an important industry in terms of employment. Many small companies in different parts of the country focus on clothing and footwear manufacturing. Most of the raw materials are imported and most of the production is exported, mainly to countries within the EU. The aim is to find foreign companies that can join as a partner and raise capital so that the operations can be modernized and expanded.
The service industries are less developed than in most other European countries. According to the official statistics for 2011, they accounted for only half the employment in the country. However, especially in the retail sector, many more work in the informal sector (see Social conditions). The major service sectors are trade, education and healthcare. A structural change started in the trade during the expansionary years after the turn of the century. Since then, many small one-person stores and family businesses have been out-competed by grocery and other retail chains. The three largest (2013) are the Serbian chain Maxi, the domestic Bingo and the Slovenian supermarket chain Mercator.
According to Countryaah, Bosnia and Herzegovina already had companies in the Yugoslav era exporting aluminum, timber and textiles. The civil war of 1992-95 broke down all such trade contacts and foreign trade began to get underway only in the 21st century. It increased significantly for each year leading up to the global financial crisis of 2008–09, but has subsequently shown less stable development. Most of the trade is with countries in the EU, and the crisis in the euro zone has been reflected in falling demand from these countries.
The country has, since it became independent, had a trade deficit and it has been strengthened for each year since 2009. In 2012, import costs were almost twice the export revenues. Exports mainly comprise metals and metal products, clothing and shoes, furniture, flooring materials and other wood products as well as components for cars and machines. The country has a growing import of fossil fuels and foodstuffs, and also imports of machinery, transport and chemical products of many kinds. The most important trading partners are Germany Italy and Croatia.
In 2007, Bosnia and Herzegovina became a member of the South-Eastern European Free Trade Association CEFTA.