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Contents
1 Introduction 1.1 1.2 1.3 Why Bosnia (still) matters . . . . . . . . . . . . . . . . . Content . . . . . . . . . . . . . . . . . . . . . . . . . . . Hypothesis . . . . . . . . . . . . . . . . . . . . . . . . . 6 7 9 12 12 13 35 42 45 50 51 56 62 66 66 69 72 74 75 78 79 80 80 85

2 Background 2.1 2.2 2.3 2.4 Historical Context . . . . . . . . . . . . . . . . . . . . . The Origins of the (democratic) State . . . . . . . . . . Development Economics . . . . . . . . . . . . . . . . . . International Interventions . . . . . . . . . . . . . . . .

3 Bosnias reality - the facts 3.1 3.2 3.3 The Dayton Constitution as a Constitutional Failure? . The Internationals in BiH -Liberal imperialism vs. Liberal internationalism . . . . . . . . . . . . . . . . . . . . Counterfactuals . . . . . . . . . . . . . . . . . . . . . .

4 Bosnias reality - the eects 4.1 4.2 4.3 The disturbed Principal-Agent relation in BiH . . . . . Shifted incentives for the elites . . . . . . . . . . . . . . The need for parallel Power structures . . . . . . . . . .

5 Bosnias reality- redistributive implications 5.1 5.2 Rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . Public goods . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 5.2.2 5.2.3 5.2.4 Decentralisation . . . . . . . . . . . . . . . . . . Ethnonationalism . . . . . . . . . . . . . . . . . . Privatization . . . . . . . . . . . . . . . . . . . . Internationalisation 3 . . . . . . . . . . . . . . . .

6 Empirical Insights

86

6.1

Entry protections . . . . . . . . . . . . . . . . . . . . . .

87

6.2

When the Bonn Powers are used . . . . . . . . . . . .

94

7 Outlook and Conclusions 4

99

List of Tables

Rates of Growth of GNP (in percent per annum) . . . .

18

GNP per Yugoslav Republic (Yugoslav Average=100) . .

19

Level of Development in BiH (Yugoslav Average=100) .

20

Economic Performance total YU in the 1980s . . . . . .

21

Casualties of the Bosnian War . . . . . . . . . . . . . . .

27

The state as a Prisoners Dilemma . . . . . . . . . . . . .

36

International responsibilities according to the Dayton Annexes . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

High Representatives . . . . . . . . . . . . . . . . . . . .

60

10

CPI in the region . . . . . . . . . . . . . . . . . . . . . .

89

11

Start-up procedures to register a business (number)

. .

91

12

GDP 2001-2009 . . . . . . . . . . . . . . . . . . . . . . .

92

13

Decisions per OHR . . . . . . . . . . . . . . . . . . . . . 5

96

Introduction

The Galup Balkan Monitor1 , a survey nanced by the European Union among the accession candidates of the Western Balkans, which is conducted every other year asked: On which step of the ladder would you say you personally feel you stand at this time, assuming that the higher the step the better you feel about your life, and the lower the step the worse you feel about it? Which step comes closest to the way you feel? The percentage of people in Bosnia and Herzegovina that felt on the top three steps decreased from 12,3% in 2006 to 7,5% in 2010; Additionally, the percentage of people that felt on the bottom three steps of the ladder increased from 13,7% to 15,3%. Despite the negative development, Bosnia shows a comparably high share of the population feeling in the worst possible situation, the Republika Srpska showed even the highest portion of unsatised citizen in the Western Balkans Region. As an alarming report of the International Crisis Group of May 2011[66] put it, Bosnia faces its worst crisis since the war. State institutions are under attack by all sides. (.....) Republika Srpska, has called a referendum that could provide support for a Serb walkout of Bosnian institutions. (......) Virtually all international institutions in Bosnia have lost authority. (......) The international community needs to step back from over-involvement in local politics to calibrate goals to a realistic appraisal of diminished powers and best guarantee stability. (.....) The EU and U.S. have been losing their ability to positively inuence change in Bosnia since 2006. OHR in particular has become enmeshed in domestic politics, taking responsibility for aspects of basic governance,
1 www.balkan-monitor.eu

such as passage of a Federation budget, that local decisionmakers should not be allowed to abdicate The High Representative reported in his Special report to the Secretary General of the United Nations on the implementation of the Peace Agreement in Bosnia and Herzegovina, that was published on the same day: I nd Republika Srpska (RS) to be in clear breach of the General Framework Agreement of Peace, in particular of Annexes 4 and 10. The recent decisions taken by the RS authorities represent the most serious violation of the GFAP since it was signed more than 15 years ago. The massive intervention in Bosnia followed the Dayton Peace Agreement that ended a war and at the same time built the constitution of the country. The success of the intervention in building a robust country can be seriously questioned considering the statements above. This work aims on contributing to the discussion on why the intervention, though supplying nancial and human resources as well as political assistance, failed so fundamentally in transforming the country economically and politically.

1.1

Why Bosnia (still) matters

Bosnia was the rst intensive and maybe least successfull intervention of the so-called international community after the breakdown of the eastern block. Communism was defeated, consequently the intervention was based on the principles of free markets and democracy. On the very same day, as these sentences are written, a Dutch court ruled that UN peacekeepers should have done more to protect three Muslim men in the UN Safe Area of Srebrenica, who were murdered, as they knew that Muslim men ran a great risk for their lifes by leaving a safe compound they guarded[121]. The genocide in Srebrenica2 that
2 A remarkable project, that shows the events in Srebrenica with original lm and audio recordings is Srebrenica mapping Genocide http://www.srebrenicamappinggenocide.com

happened in the UN-Safe area marked the rst fundamental failure3 of the International Community in the country. Sixteen Years later, the country is still (and maybe farer than ever) from Figure 1.1: Perception of being consolidated, only one third of the international community the population regard the International 2008-2010 Communitys role helpful in the last 1520 years, in the Republika Srpska not even a quarter. The intervention itself may be regarded as undemocratic or postdemocratic, focusing on fast economic reform rather than political sustainability. The constitution is largely not executable without the presence of the internationals that enforces it. In fact, Bosnia has no accepted constitution, no accepted institutions; the legitimacy of the state is under serious question. Politics and institutions form a country and people, their preferences, values and norms, ideas of rights and obligations, justice and fairness[89, p. 8]. Bosnians, that are now around the age of twenty, lived either in a country that was in civil war or in a country whose politics was lead by interethnic arguments that blocked political decisions and development. The ethnic borders, cemented in Dayton, additionally contribute to an increased ethnonationalism among young Bosnians. While 23% of the total population in Republika Srpska express, they wouldnt like a Muslim as a neighbour, among the 15-24 years old it is almost a third4 . The lessons learnt from the engagement in Bosnia should be carefully examined, studied and taken very serious by the governments around the world.
3 Esmir atis PhD thesis of 2008 at the University of Vienna, Seven Eleven examines the actions of the UN-peacekeekers. 4 www.balkan-monitor.eu

1.2

Content

This paper will discuss the background of international interventions, its roots and eects on the democratic system and the economy of Bosnia and Herzegovina. The rst part examines the background of the Intervention. The historical roots of Bosnia as an Ottoman/Habsburg protectorate consequently lead to the importance of religion and cultural misunderstandings. Bosnian Nobel-laureate Ivo Andric describes in his famous Bridge over the Drina the reactions of the Muslim population that was sure that it must be some kind of a childish game, when the Austrian bureaucracy suddenly put numbers on the houses and drew paintings of the city. Bosnia as a Yugoslav republic seems important for the analysis of the current intervention, as the economic statuso was largely cemented in Yugoslavia. Additionally, or maybe causal for that was the ethnopolicy in Bosnia, the special parity between the ethnicities and the redistribution, that was linked to the ethnicities. The idea of consensus, the government of the round table that currently dominates Bosnian decision making, was part of this Yugoslav and Bosnian ethnopolicy The war, wether it was a civil war or not, opened the door and created the demand for illegal, criminal networks and, of course, increased the ethnic divide. The origin of the democratic state, that should be the role model for Bosnia will be discussed in the next chapter. It seems important, as democracy in a western understanding means a long, intrinsic, often violent, or at least conictful process of state-building. In Bosnia, democracy was externally imposed, the institutions did not have time to develop. Development economics possibly have their origin in RosensteinRodans Problems of industrialization of Eastern and Southeastern Europe, published in 1943; the subsequent chapter deals with the theories that were developed then and since then. Bosnia is a state that runs throgh an often described tripple trans9

formation. From war to peace, from -at least to some extent - planned economy to market economy and from authocratic to democratic political system. However, an additional important factor is the international internvention and the question if the described transformations and the transformation from a de-facto protectorate to a souvereign state are parallel or subsequent transformation. The following chapter is dedicated to what is commonly understood as international intervention The second part discusses the facts that were created in Dayton. The Peace agreement ended a war, however, it was not designed as a constant constitution for a country. As Richard Hoolbroke wrote, President Clinton, maybe the most inuential person on the threeweeks session of the three presidents that nally agreed, expected the constitutuion to be obsolet in less than two years. However, 15 years later, it is still in act. Dayton may have combined the liberal demands of the western states and the special thinking of the former Yugoslav elite, in other words a market-driven economy with a bureaucratic apparatus that will never be able to handle it. The rst chapter of the second part deals with Dayton as the constitutional reality fteen years after - well - Dayton. Indirectly, the Constitution lead to the special role of the High Representative, who has the last say in every decision-making on all levels of government in Bosnia and Herzegovina. His5 role might be described as purely technical. However, in state-building there is by denition nothing technical. Neoliberal ideas may tend to justify interventions to ensure the market ruling the economy, the society. However, as the thesis should have shown until then, the market is not a abstract thing, nothing that has been here ever since. Conesquently every action of the interveners leads to redistribution and disturbs the natural chain of democratic principal-agent-prinicpal games. The liberal ideas, their economic merits and adverse eect shall be discussed in this chapter. Dayton cemented the ethnic seperation. As it is still in act and the guiding principle for the OHR, the local elites may have learned to
5 There were really by 2011 - accounting for both, the time since Dayton and the advance of mankind - just men holding this postion

10

deal with the situation in order to ensure the personal and oligarchic privileges. Again, the historical background, the ethnic denition and the war plays a major role. Richard Chaplan asks in David Chandlers Peace without Politics? Ten Years of State-Building in Bosnia: Who Guards the Guardians?. The normal democratic game of satisfying redistribution that gets awarded in elections is not only disturbed by the governmental powers of the HR, but also by the lack of any democratic control of his actions., the assymetric information between the internationals and the locals and its eects. The double principal agent-problem, discussed in the subsequent chapter, referrs to the non-accountability of OHR actions due to the missing response of the people aected and the Peace Implementation Council, as the controling body, which has even worse relation to and therefore less information from the local population. Rents, non-productive prots in an economy, arise from interventions in the economic life. Bosnia is ethnically protected, a large part of GDP is composed from foreign aid. The intervention directly acts as a demander, employer and redistributer. NGO-funding as an additional source of income, which is economically hard to account for, leads to blured economic activities. The question in this chapter is wheter rentseeking has become the most protable form of economic activity in BiH. The international eorts are often and heavily critisised; however, Bosnia would be worse o if there had never been any intervention. The subsequent chapter shall examine counterfactuals,for example if Bosnia were divided between Bosnia and Serbia with a Bosniak leftover. Another possibility would be the intervention limited to securing the entity, t.i. a mainly military intervention. Faster EU-intergration of the whole West Balkan region might reduce a lot of the conicts between the nations. The subsequent part analyzes the redistribution in Bosnia, how it is inuenced by the ethnic conict, the intervention, and the combination of both. 11

Some evidence on the theoretical approaches will be given in the last part.

1.3

Hypothesis

The main hypothesis is: Fifteen years after Dayton it is more than evident that the international intervention in Bosnia failed in the political and economical consolidation of the country. The current status has become a valuable thing to the local elites, whereas the international community shifted its focus from democracy building to implementing liberal markets, which fails due to the nature of the intervention and the ethnic divide. The international community as well as the local elites keeps a democratic facade, while the democratic participation is very limited. The intervention as well as the local government in BiH are on their way from un- to postdemocratic state and, though focusing on it, fundamentally fail economic consolidation.

Background
In Danilo Kiss words, Bosnia was once that exotic country in the heart of Europe-a land with a six-hundredyear heritage made rich with the intermingling of many cultures and civilisations. Multinational, multicultural, multireligious, its many communities-Muslims, Serbs, Croats, Hungarians, Jews-had lived together for generations. It was in Bosnia under the Ottomans that large numbers of Jews eeing the Inquisition in Spain found welcome refuge, and there they had stayed, weaving another strand into the countrys variegated tapestry. It was this Bosnia, recognised as a historically distinct entity, that was accorded 12

constitutional status as a separate and multinational republic of three equal constituent nations-Muslim, Serb, and Croat-as part of the new Yugoslav federal state established under Tito at the end of the Second World War.[9, p. 367] The international intervention followed a long and bloody war; maybe the worst crimes after WWII in Europe were commited in Bosnia during the war. The ethnical component that lead to the war and still dominates the political area in the country has its origin in much earlier times, namely at least in the times since the rst Yugoslav state.

2.1

Historical Context

One of the most signicant single events of the 20th century, the 1914 assassination of Archduke Ferdinand, happened in Bosnia and was caused by a Bosnian Serb. This incident, a symbol of the idea of liberated national states, triggered the rst World War, which somehow lead to the complicated European reality in the intrawar period, that had inuence on the rise of the Nazis, that caused the outbreak of the second World War and lead to the cold war, which was ended by the bankrupcy of communism[120], which was the base of the Yugoslav secession wars of the 1990s. As the conservative Croatian-American writer expressed in 1990: .... the previous communist hierarchies disintegrate in Eastern Europe, Western liberals rush to point out that representative democracy, coupled with the principle of one man/one vote, is the best alternative to defunct one-party communist regimes. This principle, while applicable in the ethnically homogenous countries of Western Europe may have adverse consequences in the ethnically heterogeneous countries of Eastern Europe and especially in the ethnic patchwork called Yugoslavia.[120] When thinking about the specic problems of BiH as an entity, it is crucial to understand the history of Yugoslavia -and Bosnia as an entity 13

in the modern sense of the word6 ; an entity that was created after World War One in the course of the creation of the rst Yugoslav state. This state was generally, and Bosnia specially built on the smouldering ruins of the Ottoman and Habsburg empires[116, p. 28] First Yugoslavia was maybe one of the most complex statebuildings of modern times[21], as it merged not only dierent historical and cultural origins, but also made not only Serbs, Croats and Slovenes living in one state; major minorities of the rst Yugoslavia included Montenegrins, Makedonians or Bosnian Muslims, but also non-slavic minorities as Germans, Jews, Hungarians or Albanians[116, 21, 90]. Subsequently, the people of Yugoslavia spoke several dierent languages, had dierent religions and even wrote and read in dierent letters. The people of Yugoslavia were too dierent to found a national state and too similar and the entity was too small to found an empire. Another big problem was buliding governmental institution for the newly independent state; institutions that were necessary for the transformation and the modernisation of the economic and social structures[70, pp. 61]. The rst Yugoslavia, that fullled the dream of unity of the south slavic people, that liberated the people form the Ottoman and Austrian occupation, soon became a dictatorship, ruled by the dynasty of Karadjordjevic, of Serbian origin, which lead to growing deillusions among Croatian intellectuals, that were originally enthusiastic about the idea of Yugoslav unity[116, p. 28]. Following the idea of a single Yugoslav nation with three dierent names, a centralistic constitution that strengthened the Serbian position was passed in 1921. King Alexander nally cut the democratic rights in 1929, disposed the constitution and founded the authocratic Kingdom of Yugoslavia, which was ethnically gerrymandered in order to secure the Serbian dominance in the state[21, pp. 15]. Needless to say that the Croatian intellectuals were not in favour of the centralised state and demanded more federalism, which was granted
6 There has been a Bosnia since the Middle Ages - the last major South Slav state to emerge in the 14th and 15th centuries [9, p. 373]

14

shortly before the outbreak of the second World War. The second World War meant the end of the Kingdom of Yugoslavia, and preliminary the End of Yugoslav unity, when the German Nazis and Italian Fascists annexed the territory. While Slovenia was directly annexed by the Axis , Croatia and Serbia became puppet states of Nazi Germany, formally ruled by Ante Pavelic and Milan Nedic respectively. Bosnia was a part of the Independent State of Croatia a nationalsocialist state with strong racial element and ethnic prosecution of Jews, Serbs and Roma people, including genocide campaigns that were conducted in places as the Jasenovac concentration camp[96, p. IX]. Though formally a monarchy, Ante Pavelic, the Ustasa Poglavnik, was constantly, and irrespective of his ocial position, the absolute ruler of the Independent State of Croatia. The German opression, the genocide of the Ustasa regime and the slaughter of civilians by German SS and Wehrmacht lead to resistance among the Yugoslav population, esspecially from the royalist (and Serb dominated) Cetnik movement and the communist Partisans, ocially the Peoples Liberation Army and Partisan Detachments of Yugoslavia, led by the Pan-Yugoslav idea of brotherhood and unity. After collaborating with the Axis, the Allies stopped their support to the (conservative) Cetniks and supported and recognized the Partisans as the legitimate representatives of resistance in Yugoslavia. The leader of the Partisan movement, Josip Broz, had enjoyed together with other future prominent communists of Yugoslavia a special Partisan training in the Soviet Union[124], which was very valuable under the current circumstances. The Partisans campaigns of guerilla warfare were successfull in terms of weakening the enemy and representing the popular will of opposing the opression and supporting the resistance. As a counterreaction, German and Ustasa forces took their revenge on civilians, that were supposed to support the Partisans. One of the worst crimes commited by German Wehrmacht (!) was the Kragujevac massacre [96, 80, p. 167] , a mass murder in Kragujevac, Serbia, in the 15

night between October 20/21 1941, where between 5000 to 7000 boys were killed. The Partisan movement, by the autumn of 1944 an army of 500.000 partisan ghters, in turn took their revenge on the Cetnik and Ustasa, which costed the lifes of some tenthousand people[119, p.93]. Around a million people were killed during the second world war in Yugoslavia; Bosnia, where some 10% of the population was killed, suered the proportionally highest casualities. Bosnia as a Yugoslav Republic The foundation of the modern Yugoslavia can be dated on November 29, 1943 , when the Antifascist council of the Yugoslav liberation Army (AVNOJ) met in Bosnian city of in Jajce and decided that the Yugoslav Federation of equal nations shall be governed by a preliminary government under Josip Broz Tito as political and military leader. In March 1945, when Hitlers Germany was about to capitulate, another provisoric government including 20 members delegated by AVNOJ, three members delegated by the monarchistic government in exile and ve members of the pre-war parties, was declared[119, S. 102] and secured the leading position of the Communist Party of Yugoslavia (CPY). After the CPY that was de-facto also ruling civilian life in post-war Yugoslavia, was elected by 90% of the population, the Federal Peoples Republic of Yugoslavia was proclaimed on November 29, 1945, which meant the end of the -formally still existing- monarchy [57, pp. 11 ]. The rst constiutution of 1946 dened the six republics of Bosnia and Herzegovina, Croatia, Serbia, Montenegro, Mazedonia, Slovenia and the two autonomous provinces of Vojvodina and the Kosovo and declared the concept of brotherhood and unity among the Yugoslav people as the fundament of the Federation. Economic Situation After the second world war Yugoslavia was a variant of Leninist economic system, marked by the dominance of pol16

icy over the economy and an identity of political and economic elites. The market, its objective criteria and private ownership, were not compatible with the non-competitive political system. For this reason, the economic system was arranged so that decisions were imposed from the top political hierarchy via social ownership of the means of production.[128, p.102]In short, as with the constitution, Tito took over the Soviet model, which was Stalinist; awarded even by the Fourth International, a publication ot the - trotzkist - fourth international: Of all the countries in Eastern Europe, Yugoslavia has gone the furthest in the destruction of capitalism. By June 1948 virtually all industry over the artisan level and all wholesale trade was nationalized; except for small establishments the industrial bourgeoisie has been almost completely eliminated. Its ve-year plan for the industrialization of the country is the most ambitious of all the plans in Eastern Europe.[12] Yugoslavia was, until the Tito-Stalin split in 1948 integrated in the Council for Mutual Economic Assistance (COMECON) ; after the expulsion, the country had to change its economic focus as it was blocked by the eastern countries. The eect on the Yugoslav economy, whose largest export partner accounting for more than 50%[122, p. 81] was the Soviet Union, were severe. The Soviet embargo and the weak infrastructure- that has been to a large part destroyed in the war -, in a country. that was anyway marked by a relative economic backwardness, urged the leaders, that were about to implement a strict Soviet model, to act alternatively, to change the economic policy. Yugoslavias third path of workers self managment and social ownership, that combined elements of the socialist system of planned ecnomy and the capitalist system of the free market was introduced and legally normized in the early 1950. The economic model relied on the following ve main principles as identied in Gligorov (2008)[64, p.83]: 1. Social ownership and collective managment of productive resources 17

2. Market forces allocate most goods and labor 3. Investments and capital good were nanced via the federalized banking system 4. Federalized scal system and spending power 5. Increasing liberalisation of foreign trade and capital ows A major goal was still the industrialisation and shrinking of the primary sector. The economic policy, the Table 1: Rates of Growth of GNP (in percent per annum) 52-56 Industry Agriculture 12,6% 5,9% 56-60 13,0% 9,0% opening for some free trade and low-level entrepreneurship was a success. The GNP grew around 10% per year, accounting for the increased industrial production. However, in the 1960 it became obvious that the combination of central planning, xed prices and governmental interventions on the on side and self administration and entrepreunerial elements on the other side did not lead to a satisfying competitiveness in the increasing global trade. After a constitutional reform in 1965, which economically lead to a free price mechanism, another social problem was the high unemployment due to the decreased employment in the primary sector. The Yugoslav economy showed a strong imbalance in the productivity between the richer - northern - republics of Slovenia and Croatia and the poorer republics such as Macedonia or Montenegro. These dierences did not decrease over time, on the contrary, Croatia and Slovenia, the two republics that had an above-the-average GNP per capita in 1955 were, beside Serbia, the only republics that increased their GNP per capita in comparison to the Yugoslav average. 18

National Economy 8,5% 11,9% Source: Singleton, 1982 S. 130

Table 2: GNP per Yugoslav Repubsubsidize the rest of the coun- lic (Yugoslav Average=100) Republic 1955 1988 development try or wether they misuse the reBH 83 68 -18% sources of the poorer republics for ict wether the rich republics their gain increased. Once again, the competing republics were the dominating Serbs and Croats, which were arguing about the level of centralization. The increasing conict between the republics, resulting in the Croatian Spring, and democratical and economic decits lead to the constitution of 1974, which limited the inuence of politics on the economy, and shifted power from the central government to the republics. As Dejan Jovic argues, the decentralisation was enacted due to the need to distinguish Yugosalvia from both, the rst , inter-war Yugoslavia and form the Soviet Union[27, pp. 19]. The right to self-determination and secession was legalised, but it remained unclear whether this right belonged to the peoples or to republics. Social ownership was dened as the main feature of the economic system. The system of delegates was introduced as the basis for the assemblies of all social, political and interest communities and bodies of social self-management.[94]Every Republic got its own police, educational and judical system and a central bank[116, p. 34]; the Serbian territory included two autonomous republics of Vojodina and the Kosovo; the Muslim Bosniaks were accepted as a nation. However, as long as Tito was alive, the one-man single-party state[116, p.29] was alive - noone doubted on the central power, the changes of the constituon were rather psychological and notional then real [116, p.29]. The period of 1974-1979 was eonomically successfull, though rather 19 MN M SER CRO 77 68 86 122 74 63 90 128 -4% -7% 5% 5%

Consequently the internal con-

SLO 175 203 16% Source: Yugoslav Statistical Yearbook, 1989

due to heavy investment that was possible from the increased foreign indebtness than than thanks to the new constitutional framework [128, p. 105]. After 1979, the period that was politically largely inuenced by Titos death, the indebtness lead to an external liquidity crisis ... a great outow of GNP to service debts, causing stagnation and increased internal instability. It also triggered renewed ination. This was the period of economic crisis.[128, p. 105] In 1985, when Yugoslavia did not accept the high interest rate demanded by the IMF, they were threatened by not receiving another tranche of nancing; the debt service increased tremendously[125]. The high interest rates were caused by the oil crisis in the beginning of the 1980, that lead to a decline in the prices for other natural ressources and an increase for the prices of industrial products. Both hurt the Yugoslav economy[122, p. 97]. The source of the economic crisis was sometimes found in the high cost of the complicated structures of self-managment system that had to be carried by the enterprises. Bosnia was, as Marie-Janin Calic[21, p.60] writes, the most Yugoslav of the republics. First, the trade was heavily connected with the neighbouring Croatia and Serbia. Second, the survival of the Bosnian economy was to a large extent dependent on subsidies from the central state. The industrialisation of rural Bosnia was a prestigeous projekt for the Yugoslav leaders; however, the capital intense heavy industry increased the dependence on the central state and on the subsidies. The economic backwardness was conserved[21, p.62]. In the period between 1955 Table 5: Level of Development in BiH (Yugoslav Average=100) 1955 Workers per 1000 Investments per Capita Fixed Assets per Capita 88 97 101 and 1988, the GNP per capita in comparison with the Yugoslav average decreased by 18% - by far 1988 the worst development among all 84 republics. 73 Even the number of workers, 82

GNP per Capita 83 68 20 Source: Yugoslav Statistical Yearbook, 1989

Table 3: Economic Performance total YU in the 1980s

21

Real GDP growth (% p.a.) Real net personal income (1980 = 100) Consumer price ination (% p.a.) Gross foreign debt (US$bn)

80 2,4 100 30 17,4

81 1,4 95 46 19,0

82 0,7 92 29 18,5

83 -1,3 82 39 19,1

84 2,0 77 57 18,6

85 0,2 76 80 18,6

Source: Allcock, 1992 S. 240

though the focus on heavy industry, decreased compared to the other republics. Bosnia as a backward republic was hurt by the increasing disparity in economic output among the republics that resulted form the higher federalisation after 1974 and the weaker central state, that subsidized the Bosnian economy. The relative importance of natural resources lead to a ressource curse for Bosnia that was worsened by the high ination and the partial xation of prices; which lead to a de-facto redistribution from the poorer to the richer republics[21, pp.62]. An examplatory case of the conditions of the Bosnian and Yugoslav economy in the end of the 1990s was the colapse of the food-processing rm Agrokomerc. The company, located in Western Bosnian city of Velika Kladusa controlled by Fikret Abdic, the companys boss since 1967, grew from a tiny farm plant to a conglomerate, with sales of sligthly below $200 mio. and 13.500 employees.[14]After a re broke out on Agrokomerc premises, police got suspicious and expanded their investigations on the whole of Agrokomerc business activities[101, p. 68]. They investigated that the company issued more than 17.000 worthless promissory notes up to $ 400m to 63 Yugoslav banks. The gigantic ponzi scheme of selling unsecured papers was possible due to the pressure, Agrokomerc and the communist leaders made on Privredna Banka, the Bosnian central bank to secure the papers. Thousand other companies .... besides Agrokomerc issued unbacked promissory notes and other imsy nancial instruments amounting to more than $9 billion. If they were all written o - an unlikely prospect - the enterprises and their creditors would go bankrupt, and the entire economy would collapse.[14] Agrokomerc and the bankrupcy showed the problems of the combination of decentralized enterprises and central planning. As specially these companies got a large employers, and when located in a back22

ward region as western Bosnia, the political elite pressed on the banks to nance and guarantee for theses enterprises. The ethnic scepticism increased after the Agrokomerc case, when Serbian banks were advised by politicians not to accept securities from Bosnian companies.[18, p. 73]

Ethnopolicy in Bosnia Yugoslavia generally and Bosnia especially was built up on the ethnic, cultural and religious dierences, that were folklorized and the Yugoslav state as the unifying element that incorporated the south-slavic brotherhood and unity. As a popular phrase stressed, Yugoslavia is a country of six republics, ve nations, four languages, three religions, two alphabets and one party. The system of equality and non-discrimination among the nations was maybe one of the most advanced in the world. Whereas the question of minority participation and non-discrimination, especially of autochton minorities is constantly in the agenda of, according to the public perception, more advanced societies as Canada, Austria or the United Kingdom, Yugoslavia realised a perfect system of representation and participation of every kind of minorities[88, p.18]. Bosnia was the only Republic in the country that was multinational by denition [9, p. 374], so the question of equal distribution of economic values and political rigthts was maybe the most serious in Bosnia. Consequently, quotas for every governmental, bureaucratic or economic position were implemeted, in the begining to balance the power between the dominant Serbs and Croats, later, after the constitution 1974, the Bosnian Muslims were integrated in this power sharing. Due to this perfect quota system, that dened the distribution of the countrys assets that was the base of social care, everybody had to declare herself as a member of one of the nations. Otherwise the government could not secure that everybody benets, and only benets once from the public ressources[88, p.65]. Ethnicity did not have any deeper meaning, was for many people nothing more than an empty bureaucratic demand that was necessary in order to participate in the 23

distribution of public ressources. Though there was no deeper meaning in declaring oneself as member of a nation, it still was important, even more: it was the base of redistribution, the base for employment or political power. Maybe because there was no intrinsic understandig for what it takes tob belong to some ethnic group, a major identity arose from the opposition and competition with the other nations [88, p.69]. The Yugoslav system was by denition not just, it was paritetic and its major objective was to keep the balance between the nations [58, p. 55].

The Disintegration of Yugoslavia The reasons for the breakup of Yugoslavia are manifold and often discussed in the literature. Accurate summaries of the discussion on the reasoning of the Yugoslav disintegration can be found at Sabrina Ramets Thinking about Yugoslavia (2005)[101, pp. 54] , an idea of the complexity of historical and cultural reasoning the Yugoslav breakup might be the rst chapter of Confronting the Yugoslav Controversies, namely, The dissolution of Yugoslavia[27, pp.12] , written by Christopher Bennet and Andrew Wachtel. Most scholars are generally sceptical about unicausal theories concerning the Yugoslav collaps. Political reasons may include the lack of supply in the main public goods [58, p.50]as security and justice or equality. Economically, the productivity was very low and even decreasing in the 1980 in Yugoslavia, which increased the pressure on the self-management system. The leading persons of the three main republics, Milosevic, Tudjman and Izetbegovic might have played a special role, as well as the retarded modernisation of society. Doubtlessly, the ethnic dimension played a role, however it is questionable if this nationalism arose due to the ancient hatered among the Balkan people, the impossibility to come to terms with the past massacres in Jasenovac or Bleiburg during the communist time, the redistributive importance of ethnicities or the simple factor, that elites thought to prot from an increased ethnic conicts. 24

A straigthforward explanation, given by Gligorov (1994) is, that the country simply broke up, because that is what the people living there wanted.[58, p.10] Trivial at the rst glance, this is a strong assumption, namely that all the attempts to explain the disintegration via culture, religion etc. are conditions, not causes. The breakup is a result of the choice of the people. As simple as that, rational people choose the optimal size of their state, a size where redistribution leads to their highest aggregate utility. The Yugoslav constitutional past seems very important for the Bosnian constitutional present, as the ehnic representation was the rule in Yugoslavia and is the rule in Bosnia, And Yugoslavia was a state, where the constitutional layout was per denition not just. In Yugoslavia, the main complaint was that of national discrimination. States creation was justied by the principal od national self-determination, its main problem was to accommodate claims for ethic self-determination[58, p. 55] Alesina et. al. [5, 8]7 elaborated the interconnection between government size, country size and trade openness. The basic argument is the inverse relationship between the size of a country and the degree of trade openness, as trade liberalizes, regional and cultural minorities can aord to split, because political borders do not identify the size of the market; therefore, smaller countries can enjoy the benets of cultural homogenity without suering the costs associated with small markets.[5, pp.1] The breakup of Yugoslavia happened shortly after the fall of communism; smaller European countries in Skandinavia or Austria were preparing to join the European Communities, which were about to gain importance after the Maastricht-contract. A liberalisation of trade was clearly forseeable when Yugoslavia broke up. The fact that Slovenia and Croatia, the economically most advanced republics demanded their succession the most may be a sign for the economic benets of freer trade without the burden of overproportionally nancing the Yugoslav state
7 Cited

in Gligorov (2000) [61]

25

made the people demanding the exit of their republics from Yugoslavia. Bosnia in civil war After the last meeting of the Yugoslav communists in Jannuary 1990, the Slovenian, Croatian and Macedonian delegates8 left, and thereby dissolved the Communist Party of Yugoslavia. The rst free elections in Slovenia and Croatia, held in April 1990, were won by non-communist, nationalist parties. The rst casualty happened on Croatian territory during the Plitvice lakes incidents, when Croatian police forces that entered the national park were attacked by Serb paramilitary volunteers. This rst casualty had important consequences for Serbs and Croats and contributed to radicalisation on both sides. Nationalist on both sides saw in the clash the need to adopt radical solutions, while the advocates of non-violent solutions lost inuence[65, p.36]. The ten-day war in Slovenia started after Slovene declaration of independence on June 25, 1992 and ended shortly after. Though the military action was very short, the Yugoslav leaders showed that they would use Jugoslav Army (JNA) to protect their interests. They did so in ethnically relatively homogenous Slovenia, which was comparably small and economically ever since an outsider. The conict got tougher in Croatia, starting with the siege of Vukovar and, symbollically important, the bombing of the residence of the Croatian president with JNA missiles on October 7, 1991. The rethoric of the Yugoslav leaders, that meant by real power the Serbian leaders, now went nationalist, aiming on protesting the Yugoslav unity in order to secure the Serbs living in a single state; consequently their main interest in Croatia laid in the Kraina and Eastern Slawonia, both mainly inhabited by Serbs. The nationalistic question had to get harder for Bosnia, inhabited by
8 A detailed chronology of the breakup of Yugoslavia can be found at MarieJanine Calic. Krieg und Frieden in Bosnien-Herzegovina. Suhrkamp Verlag, 1995, Allan Little. Death of Yugoslavia. Penguin, 1996. or Laura Silber and Allan Little. Yugoslavia- Death of a nation. Penguin Books, 1997

26

a relative majority of people declaring themselves as muslim Bosniaks (44%), and major minorities of Serbs (31%) and Croats (17%) , without clear interethnic borderlines. An often repeated argument is that the recognition of Croatia by the unied Germany in December 1991 put pressure on the Bosnian government to take the chance and act fast to become independent, instead of negotiating the future status of Bosnia. The large Serb population would not accept it, as As one Yugoslav later put it, each ethnic group would ask: Why should I be a minority in your state when you can be a minority in mine? War would be inevitable.[68, p. 31]9 The majority of Bosniaks and Croats voted in favour for independence on February 29, 1992, while most Serbs boycotted the referendum. The rst casualties of the Bosnian war as regarded by Serbs were recorded on the next day during a wedding, when an ethnic Bosniak shot the Serb grooms father. Bosnian Serb leader Radovan Karadi and Bosnian Croat leader Mate Boban signed the Graz agreement on April 27, 1992, an agreement on the division of the Bosnian territory among Serbs and Croats; The Graz agreement followed the early attempts of Milosevic and Tudjman to solve the Bosnian question, commonly reered to Table 6: Casualties of the Bosnian War Ethnic origin Bosniak Croat Serbs causalities 68.101 8.858 22.779

others/unidentied 4995 source: Demographic Unit at the ICTY

as the Karadordevo agreement, aiming to create a Greater Serbia and Greater Croatia; these discussions that started in March 1991 were never conrmed by Tudjman, however after his death leading politicians involved testied its existence. In the Bosniak and Croat interpretation, the rst casualties of war were the two protesters for peace that were shot by Serbian gunmen on
9 The correct qoutation would be Why should we be a minority in your state when you can be a minority in ours? to be found at Gligorov (1994) , p.87 [58]

27

April 5 1992 from and in front of the Holiday Inn Hotel, which hosted the headquarters of Karadzics Serbian Democratic Party. The Jugoslav Peoples army left Bosnia ocially in May 1992, leaving ammution, weapons and manpower (as General Ratko Mladic) to the Bosnian Serbs, namely the Army of Republika Srpska, that was by that time sieging the capital of Sarajevo. The war can be largely splited in three phases[55, pp.192]: 1. After April 1992, Croat and Bosniak troops fought unied against the Army of Republika Srpska, that was supported by Serbia/ rump- Yugoslavia. The strategic goal of the Republika Srpska was the unication of Serbian territories in Bosnia. Institutions decomposed in this time, the capital Sarajevo was besieged. 2. After April 1993, the conict between Bosniaks and Croats, who declared the Croat Republic Herceg-Bosna broke out. Bosnia was even more enclaved, frontlines ran through major cities like in Mostar. 3. With the foundation of a Croat-Muslim federation, the rst step in reconstructing the institutions were done. Additionally, the military power of the Federation, including a strengthened Army of Bosnia and Herzegovina, changed the balance of military power against the Bosnian Serbs. The war ended 1995 with the Dayton Peace Agreement which will be discussed in the next chapter. Over a hundred thousand lost their lives, over a million were refugees or lost their homes. The damages in the country and its economy were catastrophic and inluded [59, pp.14]: About 60% of the physical industrial capital was destroyed, the industrial production reached at the end of the war around 5-10% of the pre-war level. 28

 The damage in natural ressources resulted from mining and overutilisation of forrest capital to nance the war. About 40% in livestock and machinery as well as around 60% of agricultural xed assets were lost. The infrastructure has suered signicant damages, including 14 major bridges, and some 5% of the roads. Maybe worst, the damage on the houses; in major cities around 60% of the houses were damaged. The rst time after the second World War, genocide became a present topic in Europe; the term ethnic cleansing was created to describe the attempts to create ethnically pure territories by forced displacement, murder and rape. Since September 1991, when the United Nations Security Council passed Resolution 713 , an embargo was imposed on all of the former Yugoslav republics. The Army of the Republika Srpska inherited a large part of the former JNA weapons and ammunition; their territory was connected to Serbia. Croatian forces could also count on support from Croatia and had possibilities to smuggle weapons thanks to their coastline. Consequently the Army of the Republic of Bosnia and Herzegovina (ABiH), the Bosniak army was hurt the most from the embargo, as it neither had leftovers from the JNA, nor a directly supporting country and was additionally locked between Serbia and Croatia. Bosnian Serbs were therefore very optimistic about a fast victory over the badly geared Bosniak Army. Radovan Karadzic, Bosnian Serb leader asked the Bosniaks in the parlament how they thought they could ever defend themselves from the Serbian Army10 . He was expecting the Serbian victory within six days[11, p.34]. The ABiH was armed mainly from the territorial troups, that were implemeted in the 1974 constitution and under the control of the re10 source: BBC- documentary The death of Yugoslavia, part The gates to Hell - available at http://topdocumentarylms.com/death-of-yugoslavia/

29

publics, as well as police forces. Both just had light weapons that were not comparable with the JNA arms. While JNA was rather cooperative in leaving their ressources to the Serbs, the ABiH and the Croat forces tried to get the weapons with force; they attacked JNA troups that were about to leave the country (as in Tuzla) or sieged military camps (as in Mostar)[55, p. 196]. The siege of Sarajevo lasted from April 1992 until November 1995, when the Dayton peace agreement was signed, and is the longest siege of a city in modern warfare. As explained above, the dicult geographic location of Bosnia made it hard to supply the country with weapons; this fact is much more true and the scarcity not limited on weapons for the city of Sarajevo, whose surrounding hills and mountains make a greatly tragic scenery. The fact that the city survived might be explainable by the massive humanitarian aid - almost 13.000 UN supply igths were recorded during the siege; the fact that the poorly armed capital could defend itself is only explainable with the access to actors that ignored the arms embargo and supplied weapons. In fact, the UN aid was not enough to feed the whole city. The supply of weapons, petrol and food and the constant resistance in Sarajevo was possible to a large extent due to Sarajevos criminals that - while terrorizing the own population- still defended the city before the regular army was formed. As the BiH government gained control and the army was formed, some of those criminals were imprisoned, politically due to their persistant refusal to integrate into the formal military command structure and increasingly ballant law-breaking had become a serious challange to governmental authority...[11, p. 37]. As time passed, the ABiH still was in need to ensure the supply to the city; smuggling channels were established, most famous and nowadays a museum, the Sarajevo tunnel, that connected the city center with the suburbs held by the ABiH below the UN controlled airport. The Bosnian government subcontracted the supply to criminals and smugglers as they could not, at least not without getting possibly 30

blamed by the UN, fulll these tasks on their own[11, p. 32]. But also the supply of food and other goods was ensured by warentrepreneurs that gained from the scarcity and their access to the smuggling channels, the black market ourished. This market broke the ethnic divide, in a way, the besiegers were supplying the besieged, which in turn helped to prolongue the siege stalemate.[11, p. 38] For the UN-soldiers it was specially easy to collect scare goods; some engaged heavily as supplier for the besieged city. The prices of consumption goods such as food, alcohol, cigarettes or petrol rose heavily whereas the investment goods as cars crashed due to the need of people to trade them to survive[55, p.199]. The rest of the Bosnian territory was characterised by enclaves as Bihac or Gorazde, that also became very valuable to smugglers. Controlling the supply roads to major cities was a very protable business due to the possibility to tax the goods. Partly, these points were so valuable, that they were sold[55, p. 203]. The supply of humanitarian aid was sometimes blocked and regularly regulated in order to keep the prices for the consumption goods high. The war and the political economy of the parties relied to a large extent on these quasi private war entrepreneurs or warlords. In contrary to smuggling and black marketing, which do not have to be regarded as necessarily criminal acts, considering the circumstances, the paramilitary troops that fought on every side besides the regular army, proted from robbing, stealing or ransoming. Paramilitary units were sometimes made up by low-level criminals from Serbia, which were given the chance to make a small fortune in Bosnia. A reporter observed a hierarchy among the looters of the Serbian Army[11, p. 35]. Once the gthing stopped, Arkans Tigers went for the most protable goods as gold or money, followed by the Cetniks and the White Eagles who took the Hi-Fi recorders or washing machines. At the end of the ladder, there were the local militias that broke the wires out of the wall. 31

The fact that the paramilitaries were motivated to some degree by the possibility to steal the valuables in the territiories, they acquired, consequently worsened the ethnic tensions. Additionally, this fact lead to a selection of individuals with a rather low level of moral strength to become member in the paramilitary units. The Dayton peace agreement and its aftermath The international eorts for a diplomatic solution in Bosnia have had a long tradition when the relevant parties nally met in Dayton/Ohio to negotiate the General Framework. The four major peace plans [21]11 that oered before and during the war included the Carrington/Cutileiro Plan of a Swiss-like system of cantons, the Vance/Owen plan of 1993 drafting ten largely autonomous regions of ethnic determination, the Owen/Stoltenberg plan of a federation with Serb teritorrial majority and nally the Contact group plan 12 of a union of two state-like entities. After the Srebrenica massacre, the greatest mass murder since the second World War that happened in July 1995 in an area that was declared safe area under UN-protection, it became clear to the international comunity, that the military presence and diplomatic engagement had to be intensied. However it took the international players until August, when the second Makrale massacre, the shelling of a Sarajevo food market, to respond militarily and open the Operation Deliberate Force, a NATO-led operation against Bosnian Serb infrastructure. Additonally Operation Mistral, a joint and coordinated military operation of the ABiH and the Croatian army in Western Bosnia ended with a massive victory for the federated forces. After the operation, it was essential to the American negotiators to agree on a ceasere, which was hard to argue given the rst decisive victory of the ABiH; especially the generals would not understand why to stop ghting when
11 A compact though detailed summary of the approaches and why they failed is presented in Calic (1995) pp. 186-212. 12 The contact group were the permanent members of UN security council without China but including Germany.

32

they had the power on their side, while the Serb forces were weakened by NATO bombing13 . The intense military engagement and the success of the governmental forces increased the pressure on the Bosnian Serbs and on Milosevic to agree on peace talks. After the last victory of the Croat-Bosniak Federation it was essential for the US- and EU driven eorts for negotiations to keep ceasere, that would open the doors for their attempts to mediate between the parties14 . The timing was optimal, as When the ghting died down, it turned out that ABiH and the HVO and HV now controlled 51.6 per cent of the country, and the VRS 48.4 per cent. The ghting of the last few months had brought us extremely close to the 49:51 principle on which all peace eorts had been based for more than a year.[16, p. 112] The negotiatons started on November 1, 1995 at an US-airforce base in Dayton, Ohio; the negotiation team included US secretary of state Warren Cristopher as formal chairman, Richard Holbrooke as leader of the negotiations, and a representative of Russia and EU as deputy chairmen. The presidents of Bosnia, Croatia and the Republic of Serbia were representing their ethnic groups. The critical points and their solutions included: Sarajevo, the besieged and therefore de-facto divided city became Sarajevo ceased to exist. The Muslim enclave of Gorazde was cut of from the rest of the under international control.
13 Video on the political noise after Operation Mistral http://www.youtube.com/watch?v=CBSPvcfgGDY 14 Richard Holbrooke, the leader of the negotiation team, gives a -chronoligicalvery good overview on the events that lead to and that happened in Dayton in his memoirs To End a War[68]

the territory of the Federation in its pre-war borders. Eastern

Federation territory. The solution was to build a corridor-road

33

 The Brcko territory with Muslim majority was necessary to the Serbs in order to connect their western and eastern territories. neither part of Federation nor Republika Srpska. With these decisions of course, the 51/49% of teritory share did and hills, this split could be kept though. Of course the naming of one of the Entities as Republika Srpska talks; however the Bosniaks nally agreed. The solution was again Brcko under international government,

not hold anymore. Through negotiations about remote places

was a problem for the Bosniaks and almost destroyed the peace

Figure 2.1: Legislative and Executive Bodies in BiH

Source: www.ohr.int , Oce of the High Representative 34

Constitutionally, the Federation that was negotiated and agreed upon in the Washington agreement was left largely unchanged, including the ten cantons that should ensure the ethnic balance. The Republika Srpska was implemented as the second entity , though much less federalized than the Federation. Additionally a representation of the ethnic groups, the House of Peoples in the Federation and the Council of Peoples in the Republika Srpska were built in order to ensure the participation of all ethnic groups. The rotating presidency , theHouse of Representatives and a House of Peoples were implemented on State-level with equal delegation of each ethnic group.

2.2

The Origins of the (democratic) State

States have become the most dominant actors in modern societies. In explaining the state as the main institution in contemporary society, one might gain insight in the theories of social choice, as the choice of the basic layout of a state, the constitution, is a very political one. Communists and extreme Liberitarians 15 may have very dierent views on the origin, the tasks and the necessity of state. Politics, and therefore the state on any level of government is about redistribution. This implicates that all that politicians can do is decide how to distribute what from whom to whom; sometimes they can ask themselves why, however never ever if, since a no would make politics senseless. State is a contract that shall ensure the subordinates acting in a way that would be accepted as fair by the majority of the population, or, more radical by any subordinate, if she were caught in a veil of ignorance, say if the positions, identities and belongings in a society would be completely reshued. If one considers a situation where two actors can decide to steal or to trade with each other, it is clear, that in the absence of moral costs or the possible costs opposed by an authority, stealing is the dominant
15 For an idea, how radical these ideas may go: Democracy: The God That Failed Hans-Hermann Hoppe (2001)

35

strategy.[91]As presented in the table below, the payo is higher for both players if they steal, no matter what the other does. Table 7: The state as a Prisoners A/B does not steal does not steal (10, 9) steals (12, 6) Dilemma steals (7, 11) (8, 8)

At the same time, the aggregate payo would be highest, if both players do not steal, whereas the rational outcome, stealing by both actors lead to the worst outcome. In a small economy it might be possible to observe the behavior of the other actors and punish them in a more-shot game next time. In fact, there is something like a law of nature that ensures cooperation in multigames; the most successfull strategy is acting as the other actor did in the last shot16 . However, as society grows, it get less observable, who cheated. State is an institution that solves this prisoners dilemma as it is granted the power to punish in a way that changes the payos in a way that moves the rational actors from stealing to not stealing. Other linked explanations about why the state exists includes the insurance, a state may provide or the state as an answer to externalities, which bring rational actors to agree to the state out of pure selfinterest[91, p. 603]. In order to do that, a state needs three basic features, namely monopoly, legitimacy and power.[72, pp. 2] The State must act in a non-competitive environment, it must be accepted by the population and has to have the power to enforce the regulations. Two independent eects can be elaborated if the state changes the behavior above: rst, the allocative eciency, the aggregate output in the economy increases, second, it ensures fair behaviour.
16 Great insights why cooperation may emerge though competition are presented in Axelrod (2006).

36

Public goods As the example above showed, state supplies, by changing the payos
17

, a public good. The public good above might be security (for the

property of the players) or justice (as both players will face the same consequences for not complying). Public goods are goods that must be provided in equal quantities to all member of the community.[91, p. 10] Police and courts or monuments and streets may be examples for public goods. Public goods may include the freedom of movement and the security of property; as personally observed
18

, these basic public goods may conict, if for

example a biker rides through the wood that belongs to a hunter - state is not only the supplier of public goods, state has to weight them and trade them o. The state may redistibute by scal and monetary policy, granting subventions or via regulations. It is obvious,that the state has to supply basic security, as the existence and sovereignity can be threatened externally and internally without the possibiliy to secure it. Harder to describe is the supply of justice, as this is highly normative and can range from complete equality to complete freedom, from the best to the worst sense of both concepts. However, legitimacy as a basic characterictis of the state has to be earned by the state via supplying justice. Already Aristotele mentioned the importance of the middle class for the state; in the example above, if there was nothing to steal from the actors, state would not make sense. In the example above, the state ensures the aggregate outcome of the economy to be 19. However, the very fact that the state has to be present and eventually to act, leads to the demand of nancing for the government, the police, the court and the prison. So, while 19 would be the aggregate outcome, state may demand something, cost may arise for the good it supplies.
17 which includes of course acting in case of the discovery of non-cooperative behavior18 I am not a hunter.

37

When it comes to justice, another important task of the state pops up, namely the state as an insurance and a guarantee of social peace, which are regularly normized in a social contract, the constitution.

Constitution The uncertainty about future, the Rawlsian veil of ignorance leads to the constitution, as Sen describes the basic question is ..what social contract would be accepted by everyone unanimously in the original position.[114, p. 69]The core of the Justice as Fairness is the decision everybody would take about the social contract if they would not follow their own interests. Assuming diminishing marginal utility and riskaversion, the constitution would transfer from the rich to the poor, which would also be evident as most states are to some degree welfare states. The constitution sets the rules for the state, who shall have the power to control the lives of the people, who may use force to reach fairness and who nally is entitled to hold part of the liberty that has originally been held by the population. However, even if the population might agree with the social contract in the original position, which is a purely theoretical position, the constitution has to be largely followed even after the population has moved out. Rawls points out two principles of justice[114, p. 78]: 1. Each person is to have an equal right to the most extensive basic liberty compatible with a similar liberty for others. 2. Social and economic inequalities are to be arranged so that they are to be of the greatest benet to the least-advantaged members of society and oces and positions must be open to everyone under conditions of fair equality of opportunity 38

Institutions and bureaucracy The State is, once brought into life, not an abstract building; it is run by physical persons and institutions and ...every institution can be seen as being derived from a constitution[58, p. 17] The denition of a just state consequently leads to the demand of just institutions. Institutions typically include a certain task they fulll, some power to ensure the subordinates cooperating to fullll the task, persons that work for and/or lead the institution, and nancing. Institutions and the bureaucracy are the states tools of redistribution, the supply side of the public sector[91, p. 359]. As the state intervenes in the markets, levies taxes, regulates, imprisons or employs and as institutions are run by bureaucrats, a relevant question might be what the rational bureaucrat maximizes, bound by the constitution and maybe, by the political power. The output of a bureaucracy is hard to measure; even if one observes a progress, say economic prosperty of diminishing criminal activities, there might be other factors causal and the contribution of a single bureaucrat is in fact unobservable. Due to this unobservability it becomes a rationale for the bureaucrats to maximize his own job security, the importance of the bureau he works for and the budget he and his bureau receives. As the bureau redistributes, there is consequensly a tendency for overregulations that justies the existence of the governmental oces[91, pp. 362]. In analogy to the invisible hand, the maybe most famous economic idea, Shleifer and Vishny (2002) [115] developed the model of the state as a grabbing hand. While the neoclassical approach largely ignores the existence of the state or treats it as an externality, the state is in reality the most intervening factor, that disturbes the natural equilibria as it would be if the market, guided by an invisible hand and left alone would determine quantity and price. Taxes or entry regulations, but also speed limits, produce a wellfarereducing deadweight loss. The unobservability of the output and the view of the bureau as a job security and budget maximizer may be ex39

tended in politicians and bureaucrats being interested in their personal utility rather than in maximizing the public welfare. Corruption, overregulations and large governments can be explained by the politicians maximizing their personal benets, the benets for their supporters, party members or for lobbies that support them during election campaigns. The consequence is the wasteful use of public ressources and reforms that are not enhancing social welfare but rather increase the extractability of bribes. Politicians may due to the power they are granted create economic rents. A rational politician, in the absence of possible costs due to weak investigations or non-existent legal base to penalise it, may i.e. support entry barriers just for collecting a part of the rent from the producers by lobbying and bribing the politicians. The only approach to avoid this natural maximisation tendency of bureaucrats and politicians as presented by Shleifer and Vishny (2002) include granting them the lowest possible discretionary power in their decisions as otherwise they will inevitably act corruptly. Democracy The German Democratic Republic (GDR, DDR), the National Democratic Party of Germany (NPD) or the Democratic Peoples Republic of Korea (DPRK) include or included the democracy in their names. The rst one is nowadays seen as a police- and surveillance state, the NPD a xenophobic party that stated Africa conquers the White House after the -at least in comparison to George W. Bushs rst - democratic election of Barrack Obama, Northern Korea is maybe the last existing Stalinist state. Democracy has largely become a justication, as a democracy is as much good, as tootache is bad. The inationary usage of democracy after the second World War, and nally the western idea of democracy as the only remaining relevant model determines actual perception of democracy. After the the tortures at Abu Ghraib and Guantanamo became known, conducted by the remaining superpower and justied by the 40

war against terror, increased surveillance of the citizens19 in the EUstates as and the massive usage of undecover-agents in social movements20 may currently question the self-determination of man, a basic democratic principle. Democracy, in the end, means the the equal participation of all citizens in governmental decision making. This implies a certain liberty that enables the participation of every citizen in the democratic process. Democracy is a form of interaction, a form of communication between the government and the citizen. The form of public reasoning may vary, however the presently dominant form is the representative democracy, meaning that, additionally to the rights that citizens passed to the state with the constitution, their vote is represented by politicians in ordinary decision making. The fact that the vote of every citizen is actually passed to somebody else, who then represents a group of voters (or ex-voters) leads to principal-agent problems and assymetric power and information between the delegate and the voter. Democracy, though its often stressed thousand-year-old Athenian tradition[51], is a relatively recent phenomenon in its current form. The choice of democracy might result largely from modernisation, including higher education, urbanisation and wealth[71]. An economic origin of democracy has been recently presented by Acemoglu and Robinson [105]21 . The starting point of democratisation is a some kind of oligarchy or dictatorship, where a dened elite rules the state and controls redistribution. Though that can be legitimate in the sense of the majority of the population agreeing with the government, the elite will prot more
19 Angri auf die Freiheit: Sicherheitswahn, berwachungsstaat und der Abbau brgerlicher Rechte by Ilija Trojanow and Juli Zeh (2009) 20 as Danielle Durand in the Austrian animal rights movement (www.tierschutzprozess.at) , Simon Brenner in the left-wing scene in Germany (http://www.spiegel.de/unispiegel/studium/0,1518,740202,00.html) or Mark Kennedy in the antiglobalisatin movement in the United Kingdom (http://www.guardian.co.uk/environment/2011/jan/10/mark-kennedyundercover-cop-activist) 21 For an earlier, similar but less detailed approach Acemoglu and Robinson (2000) [104]

41

in this form of a government than in a democracy. In order to prevent social unrest, the elite will promise and maybe implement larger benets to the population. However, at a certain point, the costs of the ongoing promises and concessions the elite makes towards the citizen, will be higher than the loss, the elite may face when imposing democracy, as these concessions would be viewed as a sign of weakness and spur further unrest and more radical demands. The elite may therefore be forced to choose between repression and the most generous concession, a transition to full democracy.[104, p. 683] The factors that decrease the elites cost of imposing democracy include low inequality, low probability or possibility to redistribute the elites assets, and when it is poosbile to manipulate the form of democratic institutions to limit the inuence of the populations decisions[105, p.viii]. An answer whether democracy works and whether it is good for the population is given on a very basic level by Sen (2010) on the example of famine. No major famine has incurred in a functioning democracy with regular elections, opposition parties, basic freedom of speech and relatively free media.[114, p. 342] As the rulers would never suer in a famine, the rationale of politicians is to prevent uprise that would occur if the basic needs would not be sattised, if food was not supplied.

2.3

Development Economics

A seminal way of thinking about economic development is the neoclassical model developed by Robert Solow in 1956, focusing on convergence: countries with a low endowment of capital relative to labor will have a high rate of return to capital (by the law of diminishing returns). Consequently, a given addition to the capital stock will have a larger impact on per-capita income. It follows that, controlling for parameters such as savings rates and population growth rates, poorer countries will tend to grow faster and hence will catch up, converge to the levels of well-being enjoyed by their richer counterparts.[102, p. 2] The founding article of normative modern development economics[48], 42

Paul Rosenstein Rodans, Problems of Industrialisation of Eastern and South-Eastern Europe[108] dealt with the nancing need of the economies of Eastern Europe during the second World War. He promoted largescale external nancing as to industrialize the Eastern European countries and use the excess workforce employed in agriculture at the time. The nancing should be done, as he argues, by an Eastern European Industrial Trust, as the capital would not spontaneously emerge from the private sector because of external economies and complementarities between industries.[48, p. 5] Rosenstein Rodans ideas got subsequently developed to a central model in development economics, that a Big Push would get backward countries out of the poverty trap, as it supplies the basic scarce ressource, capital. A big push consequently needs some kind of governmental involvement, some kind of distribution or supply of capital, which is far from a trivial process, as it includes complex interactions between states, entrepreneurs and the market. As the state is the initial and most powerful body in the highest obligation to bring a country towards the path of development, its actions count most, its actions will determine the reactions of the entrepreneurs and the market. This leads to the importance of the special layout the policymakers determine, and indeed there is an increasing recognition that institutional and political economy factors are central to economic development[1, p.26] Underdeveloped countries typically share fragile market institutions and a relatively larger demand for public goods and social service [62], which makes the role of the state even more important for development. There is an eect of the large governments, the widespread corruption and the history of existing patronage networks, that inuence the eciency of the distribution of funds after a big push. Two popular books deal with the basic chicken or egg question, whether poverty leads to poor government or whether development lacks due to poor government. Jery Sachs [110]advocates the Millennium Development Goals to 43

reduce extreme poverty. His main message would possibly be Africas governance is poor because Africa is poor. The six major lacking kinds of capital are[110, pp. 244]: Human Capital Business Capital Infrastucture Natural Capital Public institutional capital Knowledge capital Investing in these basic factors, i.e. by direct humanitarian relief that would increase the household income, micronance that would increase the capital per person and budget support that would lead to public investment, would get the countries out of the poverty trap. Essentially , and that reects the big push, is to invest in all the identied types of capital at the same time, as all of them are needed for an eective, well-functioning eonomy[110, p. 255] An opposing position is promoted by William Easterly[49], who neglects the positive eect of large-scale external nancing and humanitarin aid on the economic development. In analogy to Sachs message, Easterlys book can be summarized as: Africa is poor because its governance is poor - and foreign aid would not change anything. The Planers, as he calls the bureaucrats in charge of distribution aid, lack the information and the observability of the eectiveness of the spreaded funds. The big plan is too complex, too big and therefore no single actor has a dened responsibility, nobody will feel responsible and act accordingly. Aid could make the bad government even worse, he argues[49, p. 135], as the existing government and its patronage network prot relatively most from aid and have subsequently higher funds to suppress opposition. 44

Searchers, the opposite of planners, would lead to economic prosperity, as the searchers are market-driven, therefore receive feedback for their actions and can be held responsible. The state plays a major role in the economic development of a country, as both approaches presented above show. However, weaknesses of the state[72, p. 31], its elite following their own interest[1, p. 27] , corruption or a weak oppostition or political suppression may lead to an inferior outcome if aid is supplied.

2.4

International Interventions

An intervention of states is always an action that aims on changing the behaviour of a country in the favour of the intervener. Interventions may include the use of force, pure diplomacy or more subtle methods as carrots and stick. The idea of International Interventions is relatively new . Only after the end of the cold war, after the end of the duality of superpowers that would never openly cooperate, an intervention could claim its internationality. Before the fall of the Berlin Wall, interventions were, depending on the perspective, ideologically driven or proxy wars of the two superpowers. The common values such as democracy, market economy and freedom, so the argument goes, make the intervention international, as these values proved to be universally right and true. International interventions aim on changing the behaviour in -at least not obviously - strategically favourable direction for the intervener; rather general principles are implemented, as humanitarian standards, rule of law, fair elections or security of property rights. The interventionist paradigm after the Cold War is thus dened along the following lines: lasting peace in an intra-state conict is established and sustained through the practice of democracy and a market economy. Democracy oers mechanisms to solve internal disputes by peaceful procedural means as it grants individual and group rights to all members of a society. A market economy fosters competi45

tion and cooperation of individuals at the local and international level, thus dening rules and procedures and shifting the focus from war to wealth.[109, pp. 98] As the intervener is no entity, has no face, no symbols, the common term used to describe him is the International Community This wording has two dimensions. On the one hand, there is the rethoric, descriptive use of more than one (western, powerfull, rich) country leading the intervention. The other, normative dimension describes these values and norms as described above and therefore derives the internationality not from the group of actors, but rather from these universal values that are presented by the intervention.[39] The media , that meant before the rise of inuential, non-western, though English speaking broadcasters such as Russia Television or AlJazeera, predominantly western media, used the term as the opposite of developing countries or rouge states; actions of the international community were justied because of the actor. With the rise of interventions, with the transformation from humanitarian, to political interventions, despite of the uncritical perception of the mass media, the questions of justiability rose among academics. There is increasingly, an oddly confused dichtonomy between those who want to impose democracy on countries in the non-Western world (in these counties own interest of course) and those who are opposed to such an imposition (because of respect of the countries own ways).[114, p. 322] Historically, democracy is per-se not a western invention; however the special institutional layout of modern democracies can be seen as western developments [114, p. 335]. By imposing exactly this layout the intervener enters in a democratically very questionable sphere, as this layout, the elections and the institutions determine the form of public reasoning and decision making in the state. The basic and rst democratic processes and state institutions are not a result of govermental policy making; the government and therefore the policy makers should be a result of a political process[15, p. 49]. 46

The dillemma of international interventions is: 1. The intervention needs power to impose its politics; however this destroys the natural democratic chain of responisibilities and therefore is undemocratic. 2. The intervention by denition inuences the market, who should be as free as possible according to the interveners. These democratic and market-economical contradictions between the path and the goal of modern international interventions are intrinsic, irrespective of the magnitude of the intervention. When U.S. troops intervened in December 1992 to stop the theft of food, they disrupted the political economy and stepped deep into the muck of Somali politics. By re-establishing some order, the U.S. operation inevitably aected the direction of Somali politics and became nation building because the most basic component of nation building is an end to anarchy. The current conventional wisdom that draws distinctions between dierent types of intervention and stresses the desire to avoid nation building may be analytically attractive, but it is not particularly helpful.[30, p. 66] The starting point of international intervention is a humanitarian state of emergency in a country. After having protected civilians, killed the dictator or ended a war, the crucial point is, if and in which form and intensity the intervention would go on - and this is a strategic decisions. The geographical position (as in Bosnia), natural ressources (as in Iraq) or the control over drug trade (as in Afghanistan) do inuence this decision. These factors are hard and strategic, as the state of emergency has ended, the country could be left alone. International interventions cost money and are therefore not easy to justify in the internal political arena. As the cases of Bosnia, Iraq and Afghanistan show, another factor, when an alliance decides to politically intervene in a country is the fact, that exit strategies are often not forseeable and the intervention and the related costs might have to be 47

bourne for a long time by domestic tax payers -and voters. Additionally, the local perception of an intervention, the respect will decrease over time, as simply the ongoing existence of an intervention proves its lack of success. Clarke is right with the above quotation in the sense that it is hard to draw a clear line between the humanitarian and the nation/state building dimension of every single intervening act; however the intervention per se, the big picture, has either a dominating political agenda, includes civilian components22 , or not23 . If an intervention changes from security building to state building, the challenge is to transform the power held by the intervener into strong, constant local power held by the left-alone state, the challange is to create legitimacy and to build up local elites that are powerful enough to take over control while being compliant with the basic democratic norms[15, p. 46]. The monopoly over the use of force, held by the intervenes in the case of a protectorate, shall be handed over to trustworthy individuals. International interventions in the contemporary sense of the word are typically led by the following strategies to achieve their nal goal of a market democracy. The free market The rst step, the rst strategy is to liberalize, privatise and deregulate in order to decrease the size and availability of rents in the economy and open the possibility of an as free as possible market. The rst major civilian act of the American-led coalition in Iraq was to suspend taris, to adopt a new banking code , to place a 15 percent cap on all taxes, and to open the doors to foreign investment in Iraq[53]. A liberalized, deregulated state who does not own companies may reduce the amount of rent; however, the process of deregulation and privatisation is very attactive for rent-seeking. As the interveners typically
22 As 23 As

it clearly is the case in Bosnia, the Kosovo or Iraq in Sudan or Ruwanda

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have a leading role in this process and they lack of inside knowledge about the patronage networks and the economic reality, they have to rely on the expertise of the current local elite, that gained possibly in the past from the overregulation. As they will still have incentive to regulate into their own pocket, the processes might not be ecient, and the rents created by the redistributional eect of building a free market might be massive. As the privatisation in Russia or other former Soviet Repbulics showed, the liberalisation can be easlily accompanied by an accumulation of funds in the hands of the old elite. Institution Building The free market consequently leads to a relatively weak state. Public goods, that played a large role in many transition countries before implementing the free market, might not be nanced by the state due to the lack of public funds. Typically the property rights are weak, corruption widespread and the public employment still high and inefcient. The free market per se did not change any of these factors, instead it might have even increased the inequalities and economically strengthened the elite. The subsequent eorts of the interveners might therefore be to build strong institutions that provide security and basic justice by i.e. strengthening property rights, ghting corruption or prosecute tax evaders. Democracy enhancing However, as institution building always includes some normative element and as institutions, their layout and hierarchies are integral components of democratic state, the high involvement of the external intervention in building them leads to fundamental democratic decits. While the free market focused on the economy, the institution building intended to build the layout, democracy enhancing aims on developing a strong civil society that would subsequently challenge the local elites 49

and lead to an increased public participation in decision making and increased awareness of the authorities actions. However, active NGO-funding and nancing the civil society may have adverse eects in comparison with the initial intention[84], as Lazic (2005) showed for Serbia: NGO- funding might lead to increased rent-seeking orientation; tations of the foreign donors, as: who has the gold makes the rules. Global trends in NGO activities were incorporated in Serbias NGOs no matter whether they made sense or were in line with the original purpose of the movement. NGOs were partly formed by experts that detected a market niche for an NGO for the purpose of obtaining external nancing. Highly educated people from science or culture were attracted by the NGO sector and its donors who, in turn requested educated and highly professional people. the objectives of the NGOs are adjusted to the presumed expec-

Bosnias reality - the facts

The present reality of the political economy in Bosnia and Herzegovina is largely inuenced by the following factors that will be dealt with below: A constitution that was designed to end the war is still in force. The legitimacy of the entity is questioned by a relatively large part of the population, especially in the Republika Srpska. However, through the Bonn-powers, Bosnia is a de-facto protectorate of the international community; the international community is enforcing the constitution. The constitution cemented the ethnic divide via dening the constitutional nations, via the territorical split and via the complex power sharing along the ethnic frontiers. 50

The following paragraph analyzes the Dayton Constitution, and discusses its ecency, irrespective of any ongoing interventions; subsequently the form of the intervention is discussed. The chapter closes with the eects of the constitution accompanied by the interventions and gives ideas about what could have been done dierent.

3.1

The Dayton Constitution as a Constitutional Failure?

The Dayton Peace agreement was signed in December 199524 in Paris after three weeks of intense negotiations between the presidents of Bosnia, Croatia and Serbia in the Wright-Patterson Air Force Base in Dayton/Ohio. The General Framework Agreement for Peace in Bosnia and Herzegovina did not only bring peace to the country that has been largely devasted by war, it also built the foundation of successful coexistence in Bosnia and Herzegovina as a country, divided in two entities of the Federation and the Republika Srpska. However, as already the naming of the two entities implies, the constitution was the outcome of a compromise, that can be summarized as keeping the entity of BiH while largely transferring the competencies towards the ethnic nations. A republic, and, even more, a federation are clearly entities of full sovereignity in international law[47, p. 184]. The complexity of the constitution, that might have been a result of the state of emergency of nding a solution in order to end a war and due to the fact that the Dayton agreement was a compromise among the (presidents of) ethnic nations, not among the population and did not only lead to four levels of government, namely the state, two entities, ten cantons, one district and 142 municipalities, but also to assymetrical design within the entities, as the Republica Srpska is largely centralized, while the Federation is federalized with ten cantons, that again shall secure the ethnic parity between Croats and Bosniaks[118, p. 4]
24 The Dayton Peace Agreement documents were initialed in Dayton, Ohio on November 21, 1995 and signed in Paris on December 14, 1995. The agreement is generally known as the Dayton Peace Accords.

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The Ethnic component Gligorov (1994) describes the foundation of a state with a document that , that is introduced and signed by We, the people. In the Yugoslavian case, the constitution would have to be signed and introduced by We, the South Slav people, implicating the changed meaning of people as well as of the we. [58, p. 16]The crucial dierence is a constitution that basically is a social contract where the the parties agree on the basic rules for the institutions they create with this contract, mainly how they are protected or equally treated from these institutions has a very dierent meaning when the ethnic people are agreeing on it; the constitution is not just to the population, but just to the people. Appendix four of the Dayton Peace Agreement is the constitution of Bosnia and Herzegovina. Its preamble ends with: Bosniacs, Croats, and Serbs, as constituent peoples (along with Others), and citizens of Bosnia and Herzegovina hereby determine that the Constitution of Bosnia and Herzegovina is as follows: The Dayton agreement not only cemented the geographical and ethnic frontlines that were a result of the war, it even iterated the constitutional core mistake of Yugoslavia, namely the(ethnic) people being the subject of the constitution. By stressing the ethnic foundation of Bosnia and Herzegovina at this point of the constitution, the ethnonational principle has quasi become the maxime of the country[47, p. 199]. The territorial divide among the ethnicities with the main competencies lying with the entities or cantons had the factual eect, that the refugee return was partly blocked, since many people did not want to live among a majority of the other nation. The present ethnic distribution in Bosnia can therefore not be compared to the melange of ethnicities as it was reality before the war[46, p. 15] . 52

Veto-rights The Dayton peace Agreement includes a system of checks and vetorights that prevent majority decision making if it would adversly eect other (ethnic) groups. For examples the presidency, the highest executive body on the state-level consists of three members; one Bosniac and one Croat, each directly elected from the territory of the Federation, and one Serb directly elected from the territory of the Republika Srpska. 25 An ethnic veto is introduced as a dissenting Member of the Presidency may declare a Presidency Decision to be destructive of a vital interest of the Entity from the territory from which he was elected(.....) Such a Decision shall be referred immediately to the National Assembly of the Republika Srpska, (....) to the Bosniac Delegates of the House of Peoples of the Federation, (....); or to the Croat Delegates of that body (.....) If the declaration is conrmed by a two-thirds vote of those persons within ten days of the referral, the challenged Presidency Decision shall not take eect. 26 The ethnic unanimity rule is a central element of the government in BiH on all levels. Since declaring a decision as opposing the vital interest of the own entity does not need any broader reasoning or can not be controlled by any (mulitiethnic) body, the right to veto decision has become a powerful tool for making politics among the own ethnicities. The unanimity produces high costs of decision making, as it is slow and the possibility to veto has per se a value in possible negotiations. In Bosnia however, the ethnic tensions after the war and the complex governmental structure worsens the eects of the veto rights. Dzihic (2009)[47, p.210]describes Bosnia as a Consociational democracy, which can not function, as there is neither consens about the rightfullness of the entity nor about the form of the political system.
25 Appendix 26 Appendix

IV, Article V of the Dayton Peace Agreement IV, Article V, Point 2d of the Dayton Peace Agreement

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The eects of the Veto-rights as the most visible sign of the consociationality is the priority of power sharing and power keeping above decision making. Complexity The enormous amount of levels of government combined with the ethnic parity that is followed on each level, leads to an unclear, intransparent and easily abusable bureucracy. A total of 171 governmental departments on ministry level (9 on state level, 16 in each enitity and 13 in each canton)[47, pp. 201]are the executive reality in Bosnia and Herzegovina. As each body, each position has its own ethnic determination or distributive key, the bureaus can use their power for their ethnic group instead of for ecient, maybe just administration and redistribution. Stateness The Annex IV of the Dayton Peace Agreement denes the ethnic component as the guiding maxime of policy in Bosnia and Herzegovina and thus leads to inecient and large government and was somehow externally imposed. A constitution shall be the foundation of a state. In questioning wether the Dayton constitution can be (ignoring the international intervention) the foundation of a state, the rst objection might be the naming of the entities as discussed above. By dening the state as the monopoly of the legitimate use of force[72, p.2], BiHs stateness is questionable at least concerning the monopoly and the legitimacy. The competencies of the state-level include the foreign-, currencyand defence policy as well as the coordination among the entities and immigration[47, p.202]. Essential competencies such as health or energy lie with the entities. Citizenship, meaning the right to include or exclude individuals to the legal population base is a competency of the entities; before the police reform carried out in 2008, even the police was (ethnically) divided among the entities. The monopoly of the state level is therefore for 54

essential public goods not existing; the reason for that is the relatively weak position of the central state towards the entities[47, p.39]. The question of legitimacy is not the one that can be directly controled by the constitution; rather the constitution as a whole has to be largely accepted in order to provide legitimacy to the state. This point shall be discussed here in order to examine the stateness of Bosnia and Herzegovina. The Gallup-Monitor 201027 shows a frightening 88% of the population in the Republika Srpska being in favour of a secession28 . Over one third of questiones Bosnians answered yes to the question Would you support the split-up of the Bosnian Federation into a Croatian and a Bosnjak entity?. And nally, 62,5% agree with the fact that Bosnia does need a new constitution. The ethnic maxime in the constitution is questioned by a majority of the population, as only 22% of the population think that they should be free to limit accession to political positions to any ethnic group (after the European Court of Human Rights ruled that the exclusion of Jews and Roma from Bosnias highest state oces is unlawful discrimination). The vast majority in one entity question the rightfullness of the state, the majority of the state sees the need for a new constitution and opposes the guiding principle of the current constitution. In fact this is a strong sign for serious legitimacy problems of the stateness in Bosnia and Herzegovina. Public Goods The state shall be the supplier of public goods, the main public goods are security and justice.[58, p.100] Bosnia provides basic external security to its citizens - defense lies with the central state. After the Police reform, also the main responsible body responsible for internal security is under the supervision of the central state; however, the entities still have their own ministers of interior, who is embedded in the police work
28 The question was formulated softer: Would you agree with the secession of Republika Srpska into an independent state, if the people in Republika Srpska voted for it? 27 http://www.balkan-monitor.eu/index.php/dashboard

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when it comes to the fundamental interests of the ethnic group. The OHR states among the myths about police restructuring29 : MYTH TWO: Police restructuring will abolish the RS Ministry of Interior. Fact: No. There is nothing being proposed that requires the abolition of the RS Ministry of Interior. Anyone who says this is mistaken. The importance of this topic obviously shows the power that the ministries give to the entities. The Dayton constitution can be however seen as a proper base for the basic supply of security. The question of justice, which means that the states has the authority to supply justice via their laws, its institutions and bureaus if citizens demand it[58, p.101]. The same that was said above about the Yugoslav constitution, can be examined for the Dayton Constitution: Both are per denition not just, as the adressees are not the citizens but the ethnic nations.[58, p. 55]Consequently, the objectivity and equality among the population is not realised, which is shown on a prominent level for the 2009 European Court of Human Rights ruling, that the exclusion of Jews and Roma from Bosnias highest state oces is an unlawful discrimination. As these quotas are implemented and inacted on all levels, a basic requirement of justice is -purposely and prominently - not met by the Dayton constitution. Again it was the need for interethnic of power sharing in Dayton and power keeping thereafter that cemented the status and hindered justice, as it did with ecency.

3.2

The Internationals in BiH -Liberal imperialism vs. Liberal internationalism

The International Community in BiH in its current layout is the result of active eorts carried out in 2002 of streamlining the international presence in the country in order to reach maximal ecency and avoid
29 http://www.ohr.int/ohr-dept/rule-of-law-pillar/prc/default.asp?content_id=34263

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overlapping structures30 . Besides the Oce of the High Representative, which will be discussed in detail below, the international institutions in the country form the Board of principles, whose permanent members are EUFOR, NATO HQ Sarajevo, OSCE, UNHCR, EUPM and the European Commission. Additionally international nancial institutions such as the IMF, World Bank, and the UNDP are regular participants in the Board of Principals. The European Union Police Mission (EUPM), is, under the supervision of the EUs institution building programm, reaching as part of a broader rule of law approach, in line with the general objectives of Annex 11 of the Dayton Agreement, to establish sustainable policing arrangements under BiH ownership in accordance with best European and international practice and thereby raising current BiH police standards. EUFOR-ALTHEA as a military deployment in BiH is in charge to supervise the military implementation of the Dayton Agreement. ALTHEA followed the NATO - engagements of SFOR and IFOR and also took over their tasks, including having full authority to full the role specied in Annexes 1A and 2 of theDayton Peace Agreement. The deployment consists of about 7,000 soldiers. However, NATO still keeps the presence with its Headquarter Sarajevo, having the mission of defence reform, assisting BiH in meeting the requirements of NATO membership after having joined the Partnership for Peace in December 2006, supporting the International Criminal Tribunal for the former Yugoslavia and counterterrorism. OSCE as well as UNHCR engage in their core competencies of conict prevention, crisis management, post-conict rehabilitation and protection of refugees respectively. The European Commision upholds the general interest of the European Union, specially the intergration process and provides support to the other EU-actors as the OHR, European parlament or the EU presidency.
30 http://www.ohr.int/board-of-princip/default.asp?content_id=27551

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Table 8: International responsibilities according to the Dayton Annexes Annex Area of Authority International Body 1-A Military Aspects NATO 1-B Regional Stabilisation OSCE 2 Inter-Entity Boundary NATO NATO 3 Elections OSCE 4 Constitution UN HR Article IV Constitutional Court ECHR Article VII Central Bank IMF 6 Human Rights Ombudsman/Chamber OSCE/ CoE 7 Refugees & Displaced Persons ECHR 8 Commission to Preserve National Monuments UNESCO 9 Commission on Public Corporations EBRD 10 Civilian Implementation UN HR 11 International Police Task Force UN source: The General Framework Agreement for Peace in Bosnia and Herzegovina, Chandler (2000)

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The Oce of the High Representative The position of the High Representative (HR) was created in the Annex X to the General Framework Agreement for Peace in Bosnia and Herzegovina. The HR is responsible for the civil implementation of the Dayton agreement. His tasks include monitoring the implementation of the peace settlement, maintaining close contact and ensuring the compliance with the agreement by all Parties in the country, as well as coordinating the activities of the civilian organizations and agencies in Bosnia and Herzegovina to ensure the ecient implementation of the civilian aspects of the peace settlement. The OHR, who is at the same time the EU Special Representative in Bosnia and Herzegovina, is working with the people and institutions of Bosnia and Herzegovina and the international community to ensure that Bosnia and Herzegovina evolves into a peaceful and viable democracy on course of integration into Euro-Atlantic institutions.31 . The Peace Implementation Council (PIC) is a group of 55 countries and international organisations that nance the OHR, who is, in turn, responsible to the PIC. The Steering Board of the PIC additionally nominates the High Representative. The United Nations Security Council,has to endorse the nomination of the OHR. The PIC expressed the rst priority in BiH after the war in securing the peace; consequently the rst Conclusions Of The Peace Implementation Conference Held At Lancaster House London on 08.12.1995 were: The Conference agrees that the peace should result in : the creation of a climate of stability and security in Bosnia and Herzegovina and the achievement of a durable and lasting political settlement; the establishment of new political and constitutional arrangements for Bosnia and Herzegovina that will bring the country together within a framework of democracy and the rule of law;
31 http://www.ohr.int/ohr-info/gen-info/default.asp?content_id=38519

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the protection and promotion of human rights and the early return of refugees and displaced persons; the establishment of an open, free-market economy in Bosnia and Herzegovina; a kick start to economic reconstruction; the normalisation of relations between Bosnia and Herzegovina and her neighbours, the region and the rest of the international community; the creation of a direct and dynamic contractual relationship between Bosnia and Herzegovina and the European Union within the framework of a regional approach; succesful implementation of the Basic Agreement on the region of Eastern Slavonia, Baranja and Western Sirmium; important economic opportunities for countries neighbouring former Yugoslavia. 32 Table 9: High Representatives Name Country from Valentin Inzko Austria April-09 Miroslav Lajk Slovakia August-07 Christian Schwarz-Schilling Germany February-06 Paddy Ashdown United Kingdom June-02 Wolfgang Petritsch Austria August-99 Carlos Westendorp Spain July-97 Carl Bildt Sweden December-95

to present March-09 July-07 January-06 May-02 July-99 June-97

However, ensuring peace was not enough in order to build democracy and establish a market economy. While acting carefully and mainly aiming on securing the unity and peace in BiH, the pressure of the PIC on the HR soon became more towards approaching democratic and economic standards in the country. Senada Selo Sabic[109] classies the periods of the OHR agenda of the early intervention in BiH as Security building 1995-1997, Institution Building 1998-2001 and Norm Building after 2001.
32 http://www.ohr.int/pic/default.asp?content_id=5168

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The more the intervention approached law-making, the more resistance of the local elites and the ethnic parties was to be expected. While the initial idea was, to have the HR as a manager of the international communitys post-conict peace building eorts, and a mediator between the parties[95, p.13], it became clear, that no active policy making would be possible without the power to enact laws. The rst sign of strengthening the postition of the HR was the Sintra Declaration in May 1997, when the PIC, worrying about the increased nationalism in the media declared in point 70: The Steering Board is concerned that the media has not done enough to promote freedom of expression and reconciliation. It declared that the High Representative has the right to curtail or suspend any media network or programme whose output is in persistent and blatant contravention of either the spirit or letter of the Peace Agreement. With the help of U.S military, that used transmition-jammers and occupied Serb transmition station[95], this, rst strong engagement of the HR was, not surprisingly, successfull. There was however more need for active actions of and therefore greater powers for the HR, additionally a legal base for these actions had to be found. The Article V of Annex X to the Dayton Peace Agreement norms that Final Authority to Interpret The High Representative is the nal authority in theater regarding interpretation of this Agreement on the civilian implementation of the peace settlement, which was the base of the following decision at the BONN PIC MAIN MEETING held in December 1997, namely: The Council welcomes the High Representatives intention to use his nal authority in theatre regarding interpretation of the Agreement on the Civilian Implementation of the Peace Settlement in order to facilitate the resolution of diculties by making binding decisions, as he judges necessary, on the following issues: 61

1. timing, location and chairmanship of meetings of the common institutions; 2. interim measures to take eect when parties are unable to reach agreement, which will remain in force until the Presidency or Council of Ministers has adopted a decision consistent with the Peace Agreement on the issue concerned; 3. other measures to ensure implementation of the Peace Agreement throughout Bosnia and Herzegovina and its Entities, as well as the smooth running of the common institutions. Such measures may include actions against persons holding public oce or ocials who are absent from meetings without good cause or who are found by the High Representative to be in violation of legal commitments made under the Peace Agreement or the terms for its implementation. 33 The Bonn Powers, the fact that the HR has the last power in every political, administrative and judicial issue on all levels of government in BiH were created.

3.3

Counterfactuals

An incontestable merit of the Dayton Peace agreement is the fact that it ended the war. This fact is often stressed; mostly under the connotation of the intrinsical mistakes the agreement bears and introduced by a but at least. For the following critics it is important to sort out whether there have been other possibilites for the international community to act or react and still end the war. The international community is nowadays often critisised for its weak engagement during the war; at the same time it is critisised for its too strong engagement in the reconstruction process in the country.
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As the following chapter critically examins the eects of the intervention on the political economy in Bosnia and Herzegovina, this paragraph gives an overview about possible alternatives, the international community could possibly have taken in consolidating and restructuring the country. No intervention The fact that the United States from the end of 1994 onwards at least passively supported the Bosniak and Croat forces determine what shall be understood as no intervention. Namely, no subsequent, direct intervention in the power structures of the country. In fact the success of the Federation forces in the second half of 1995 were largely due to the military support and largely ignoring the embargo imposed by the UN security council on the states of the former Yugoslavia. Additionally, the peace intiatives initiated during the war and shortly described above, had the idea of ethnic power-sharing as a principle of future coexistence in BiH. The strategic goal of the war parties was consequently blured by theses initiatives, the more territory could be occupied, the higher the bargaining power had become at any time[58, p.125]. It might be a reasonable speculation that without any international initiative at any time the war would have been kept less oensive. However, these initiatives, the international media coverage and the internal pressure, at least after Srebrenica, the second Makrale massacre and the bombing of Bosnian Serb infrastructure in 1995 left de facto no possibility for no subsequent international action. Without overspeculations, it can be assumed that the war would have gone on without the intervention; the ending support for the Bosnian Serbs from Belgrade and the starting international support for the Federation shifted the power balance, so that the Bosniak/Croat forces might have been in a better position in the end of 1995. However, reoccuping ethnically cleansed territory or revenge could have led to enormous additional casualties and destruction. 63

Intervention just to secure the entity Categorically neglecting the possibility of no intervention as the intervention was too much a fact in 1995, the intervention could very well have taken another layout. The main aim was to secure the entity, to secure the consistency of Bosnia and Herzegovina. Some bureaucracy and possibly military troops would be necessary in the country; however no active engagement in the internal decision making in the country. While this scenario sounds as it would have been an attractive scenario that would have fundamentally reduced the democratic decits the intervention inevitably brings, the outcome would have most likely been inferior. As the, compareably, strong intervention shows, the power structures are mostly interested in keeping their spheres of inuence. The entities are currently in the position to enter seperate contracts with countries. Large parts of the competencies are distributed at levels below the state level. As mentioned above, the stateness of Bosnia and Hercigovina is currently questionable. An intervention with the sole goal to secure the entity would have done probably worse, as securing the entity is not a simple, technical task, but it includes political decisions, as what denes the entity, what competencies have to rest with the central state and what if a level of government would simply ignore the unity. An intervention that would be limited to guaranteeing the unity would possibly face the same problems as the current intervention, however on a much lower level, and therefore much more abusable by the ethnonational politicians. Most likely the competencies of the central state would be weaker and the cooperation among the entities diminished. BiH divided, Croatian- Serbian protectorate and Bosniak state The Republika Srpska and the Bosniak/Croat federation share the territory of Bosnia and Herzegovina, irrespective of the Brcko district, with 49% versus 51%. The Republika Srpska as well as the Federations Cantons are largely ethnically pure. The existance of a feder64

ation between the Bosniaks and the Croats can be largely explained by the historical events and the fact that they were forced into the common body to merge the power against the Bosnian Serbs. The main intention before Dayton has been to have instead of the Republika Srpska Serbian Cantons that would add to the Federation34 . It might be reasonable to assume that without the federation existing in 1995, the Croats would have demanded an equal Republic of their own. Assuming three ethnical republics on the Bosnian territory, including the Serbian neigbouring Serbia and the Croatian neighbouring Croatia, it might have been attractive subordinate these republics under their homeland and have an independent Bosniak rump state. The argument, that this state would be too small or without sucient economic substance might not count since the independence of Kosovo. However, this model would oversee the causality of the ethnic pureness, namely that the territories are to some extent ethnically pure, as everybody has to declare herself as member of an ethnic group, and there might be a tendency to be a part of the majority. People from multiethnic ancestors or people that would dene themselfes as Bosnians would be forced to live in a monoethnic -and probably heavily national - state. In the analogy of the popular phrase that Bosnia is the small Yugoslavia thanks to its ethnic mixture and , maybe also due to the inherited problems, there would be three republics that would share a considerable minority that - again - would not agree with the entity. Additionally, of course, the war has lead to ethnically unmixed territories; by accepting the secession of the Croatian and Serb parts, the international community would have accepted the Serbs and Croats as winners of the war, as the Bosniaks never fought for a monoethnical state, but for a multiethnic Bosnia and Herzegovina in its historical borders. Economically, a bosniak rump state would face severe diculties, if the other republics would have been integrated in any way to Serbia or
34 see

the prior peace initiatives

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Croatia respectively. The tiny coastal town of Neum would have probably become Croatian territory, the country would have been totally landlocked between the Croatian and Serbian sphere of inuence. The trade of the secessing parts would possibly orient towards the economically stronger Serbia and Croatia.

Bosnias reality - the eects

The combination of an externally imposed constitution that includes the ethnic parity as one of its main principles and the ongoing international intervention has and had severe eects on the political and economic sphere in Bosnia and Herzegovina. Despite the undemocratic factor that might be anyway a question of morality and philosophy, these factors would have, independently analysed, a suboptimal eect on these spheres. The combination however leads to almost unsolvable oposing interests between the local elites and the international community. The reasons for these adverse eects when implementing market economy and democracy are presented in the following. The natural democratic chain of signaling and being held responsible is broken due to the absence of mechanism that would punish the bureaucrats in the international organisations for non-ecency maximizing policy. The veto-rights and the ethnic non-discrimination maxime leads to shifted incentives of the voters and lead to nationalist voting. Liberal, meaning weak state, government demand by the international community lead to parallel power structures that enhance the weakness of the state.

4.1

The disturbed Principal-Agent relation in BiH

A problem in every relationship where power is granted to somebody else might be the adverse utility. A Principal-Agent problem typically arises in employment or top- executive compensation and can be formalised as the utility of an Agent, Ua , is based on his actions, whether to cooperate, an or to cheat on the principal, ac, so that: 66

Ua (ac) > Ua (an) On the contrary, the payo of the principal, Up has the opposite preferences, t.i.: Up (ac) < Up (an). The problem arises due to assymetric informations - the agent typically is in the posession of more knowledge - and the impossibilty to perfectly monitor the actions of the agent. The Principal Agent problem is typically solved via contract design that increases the incentive for the agent to act in the interest of the principle and makes it easier for the principle to monitor the actions of the agent. The democratic state in the modern sense is almost always ruled by some kind of delegation. As the sovereignity rests with the citizens, politicians compete for their votes, which is the delegation of the the citizens power share to the politician. As soon as the right to make decisions is delegated, some kind of agency-relation is established, simply due to the fact, that some discretionary power has to stay with the elected politicians - otherwise, there would be a complete contract and politicians would not be necessary. In democracy regular elections establish a mechanism for the citizens to control their politicians - if they do not act in their - perceived - interest, politicians will be removed in the subsequent elections. The only consequent denition of democracy includes therefore that, even if the policy making is done indirectly, by delegating the power, the majority of the citizens can fundamentally inuence the policy, including the removal of the policy makers. In Bosnia however the last say in every decision making rests with High Representative, who is accountable to the Peace Implementation Council. The typical factor, that gives rise to the Principal-Agent problem, the assysmtric information between the Agent and the Pricipal, is fundamentally worse in the case of Bosnia, where the PIC, consisting of delegates of govenments, have no or if, very little and biased, possibility to observe the eects of decision-making in the country; the stakeholders - those most aected by the actions of the international administrators - are largely excluded from these processes[23, p. 158] Though there are obligations of the internationals to report and in67

form formally and informally their supervising bodies about their decisions and policies, thes obligations and the fact that formally, no other opinions are demanded by these bodies have the obvious eect,that critical examinations of the own performance do rarely happen[23, p. 160]. Of course, media coverage or the existing NGOs might comment the actions of the international community in the country; however NGOs can be limited in their criticism by nancing needs which are often dependent on the funding that is granted by the international community. Media coverage and comments of the local politicians are often nationalistically motivated and it is therefore hard to observe, which criticism on the international engagement is reasonable critics on the actions carried out and which critics are pure nationalistic policy making. In fact, and this is the crucial point, in a functioning democratic chain of accountability the citizens would judge whether the critics (of the oposition i.e.) is justied or not; in the case of Bosnia, this function is covered by the PIC, that is not accountable to any elected body. The dillemma can be ilustrated by an PIC Steering Board Communique of July 7, 2011 concerning the problems in building a state-level govenment: The PIC SB is gravely concerned at the fact that political leaders in BiH seem so little troubled by these consequences, and it calls upon them to put the interests of the country and its citizens rst and to engage in serious dialogue, in a spirit of compromise and in accordance with the requirements of the General Framework for Peace (GFAP) to enable the appointment of a broad based state-level government without further delay. The political leaders should act in a way that inspires the young generation rather than disenchant them. ....... The PIC SB reminded all parties of their obligation to fully comply with the GFAP, all its annexes, and decisions of the High Representative. The PIC 68

Steering Board underlined that the International Community retains the necessary instruments to counter destructive tendencies and that it will not allow attempts to undermine the Dayton Peace Agreement. The full, unconditional support for the High Representative is stressed, the full compliance with his decisions is demanded by the elected (!) politicians. The foundation of a government is a political, not a formal process; blocking the foundation of a government in a country with a functioning democratic dialogue would probably be penalized by the voters in the next elections. However, as this mechanism is not functioning in BiH, the highest supervising body, the body the OHR is accountable to has to demand it as a result of the not functioning solutions to the Principal-Agent problems and due to nationalistic voters preferences. The Google web search of the OHRs website ohr.int leads to 1.220 results for the phrase full support for the High Representative, reecting the steering boards communique, but mostly the OHRs decisions, that stress their legitimacy as at comes from the PIC, a legitimacy that would in a democratic state come from the parlament and from the voters respectively.

4.2

Shifted incentives for the elites

The simple existence of the internationals in Bosnia changes the behaviour of the local elites. The fact that the High Representative does intervene in political decisions, removes ocials and imposes laws opens perfect possibilities for the locals to hide behind the international institutions and their omnipotence as the main source of bad policy[123, p. 110]. Again, it is the combination of externally imposed, undemocratic decision making, that is oftenly forced by nationalistic policy and the ethnic parity and veto-rights that fundamentally shift the incentives for the local elites, as they both can be abused, the rst as an excuse 69

for non-functioning of the system or single policies, the second as a perfect tool for mobilisation among the own ethnic group. Utility eect of the intervention Rational politicians maximize the probability of reelection and the size and extractability of the rent that is dedicated to the positions they hold[7, p.1]. The size of the rent depends on the ocial ressources the government receives, and where a factor can be used for personal gain, be it a private lunch, a larger car or a higher salary to be paid by the governmental ressources. However, the rent also depends on the size of informal ressources, that can be extractable due to the position held, such as bribes or special gifts; Additionally, foreign aid increases the taxbase and has to be redistributed, which makes the likely to be added to the total size of the rents in an economy. In Bosnia, the size of the extractable rents in the country is inuenced by the complexity of the governmental system, including various levels of local authorities as well as the High Representative and his oces and bureaus. Since transparency, clear authorities, rights and obligations reduce the possibility to abuse bureaucratic and governmental positions for personal gains, the reality in Bosnia and Herzegovina is almost the complete opposite to this ideal status. The complexity leads to relatively lower observability of non-cooperative behaviour and therefore less potential costs, as it is less likely to get caught, if, for example, licenses are issued for bribes only. The probability of reelection in general depends on the satisfaction of the majority of the voters with the performance of a politician; usually ecient redistributive policies, that are regarded by the majority as just and fair are awarded. Rational voters elect the politician or party, which would bring them the highest utility, if they hold the position. As there is a common base of policies that are rewarded as utility maximizing and the voters are generally normally distributed around that median voter, major party 70

candidates tend to select policies that are relatively close to the median voters preferred ones. In a democracy with majority vote, this leads to each candidate competing for the favor of the median voter, resulting in the political positions of the candidates orienting towards bundle of policies that maximize the median voters welfare[91, pp.304]. In Bosnia, majority voting is not realised, in contrary, the ethnic principle assigns certain positions to members of a certain ethnic group, not to the politician that has the most votes. The fact that the electoral system is designed for the equal powersharing among the ethnic groups, their non-discrimination and their protection, also leads to severe implications to the utility of the voters. Because the delegates of a certain ethnic group protect and ght for the groups interest as the delegates of all groups do so, and as the distribution of the public goods is also led by the idea of ethnic parity, the rational voter will always, and even without strong nationalistic preferences, vote for the most nationalistic candidate, as he ghts hardest for the own group. This is the basic rule of the internal policy game in Bosnia: ghting for the ethnic group, not for the citizens in general, which implies another specic element of the intrinsic logic of Bosnia after Dayton, namely the idea that politics is a zero-sum game. The public ressources have to be distributed and the gain of one group equals, even is identical to the loss of another group. There is a trade-o between the satisfaction of non-cooperation with the other ethnic group and the higher GDP per capita, that could be achieved by cooperating in the political as well as in the economic eld[98, pp. 120]. The fact that cooperation leads to higher GDP, by the gains from trade, but also by carrying out necessary reform, which can be blocked by an ethnical veto are deeply discussed in the relevant literature. The idea that there is a satisfaction to the elites from non-cooperation with unloved potential partners needs an analysis that goes beyond the acient ethnic hate. Pschl (2004) [98, pp. 120]stresses that it is not 71

the people, but the local elites that keep the uncooperative status quo, elites that gain from defending acquired prestige or monopoly positions. Illegal, black or grey markets are not free market or competitive markets , and oer the possibility to extract rents from these quasi-, semi- or illegal markets. In addition to the factors above, that will be discussed in the redistributive part below, another explanation from rent-seeking theory, that is not directly linked to the fact that elites want to keep extractable markets alive, seems possible. It is under certain circumstances more attractive to compete for a rent than to engage in a productive way. By giving the impression of the total ressources of the country to be an external, not inuenceable factor, local politicians can enhance the ethnic component and force justifyable non-cooperation. It is simply the easiest agenda for them, to follow the competition for these resources, as it includes three perfect others to blame, namely the other two groups and the internationals, and as the agenda does not need any reasoned bundle of policies. Additionally, it is easy to communicate and there is nothing to lose , as there are no gains from reforms or trade that could be divided among the ethnic groups. And the rational politician of an ethnic group in BiH is right; the situation is a prisoners dilemma: Even if there would be a mutually benet outcome, if all parties would nd a compromise, the dominant strategy is not to cooperate, irrespective of what the others do.

4.3

The need for parallel Power structures

The Balkans was traditionally a region where informal connections counted[46, p. 337] and like in many communist countries informal connections and relations had two important functions in Yugoslavia. First, they substituted the formal free market and allowed for private trading, second it was a possibility to participate via connections in the allocation of public ressources in a privileged way. The war led to an increased importance of the ethnic networks, considering the fact that other ethnic groups were, at least in Bosnia, to 72

some extend enemies. Additionally the international sanctions imposed on the territory of the former Yugoslavia opened the need for trustwothy networks, as the trade of weapons was, at least in the supplying country, illegal, and therefore hardly enforcable under the the jurisdiction of the supplying country. One of the main and rst ideas of the intervention was to bring an as liberal as possible economic system to the country [99, 46, p. 337], and that implied a relatively weak state. The neoliberal ideal would be a state as narrow as possible that is a non-interventionistic, rather technical than political instrument that ensures free trade. As long as the informal structures were existing, the elites largely reproduced from the leading illegal networks, thanks to their close ties with the ocial governments and the inuence of structures was not reduced. In the contrary to the weak state, the illegal and informal networks could very well adjust to the intervention and the new ocial power structures. As the free market, if imposed on a given set of wealth distribution, connections and illegal markets favours the elites, an unintended consequences of neoliberal intervention thus include the reinforcement of corrupt elites, the siphoning of privatised public assets into private pockets and the privatisation of government.[99, p. 9] The Yugoslav system was characterized by the priority of politics over the economy, the war economy was a state of emergency, where the parties interfered heavily in the economic life in order to nance the war, recruit soldiers and get equipment. The liberality in the sense of a proper and sharp distinction between governmental and economic ressources, power and obligation was formally only imposed on the country with the intervention. However, large parts of the ethnically divided elites proted heavily from the war economics; they acted as a bureaucrats, but also as entrepreneurs, i.e. by smuggling arms into the country; a distinction between those dierent roles was almost impossible. The importance of the ethnic component after Dayton added to the factors above, namely the liberal nature that would not allow for high 73

economic gain if holding a political position and the existing structures, that made it attractive, for holding the economic status even necessary to keep the existing structures and run parallel governments that informally but with higher ecency and possibly even legitimacy controlled the life in the country. For the Croats that were forced in a Federation with the Bosniaks, the incentive was the highest to keep these structures alive as long as possible to participate in the division of the governmental ressources. The Croat Republic of Herceg-Bosna simply ignored the ocial institutions for a long time and governed by their own. The OHR notes in his decision of October 10, 200035 the persistent failure of the responsible politicians to address the untenable situation of lawlessness and parallel structures in Zepce and thus overcome the legacy of the Bosniac-Croat war in that area The international community(...) have worked on nding an agreement acceptable to all parties to break a triple deadlock in the Zepce area: a) to integrate two parallel municipal administrations, b) to dismantle the institutions of the former Croat Republic of Herceg-Bosna and integrate all of Zepce municipality within the legal structures of Zenica-Doboj Canton, and c) to reach a compromise solution on the demands of Croats, living in areas bordering Zepce municipality, to be integrated with the latter. The decision also notes the repeated failure of elected politicians to reach a solution by themselves which prompts me to issue this Decision

Bosnias reality- redistributive implications

The prior parts described the Bosnian status quo that is largely inuenced by the ethnonational principle that internalized the logic of the war in the Bosnian current politics, and the international intervention that has the last say in any decision making. The eects of these major factors of inuence discussed included the non-functioning democratic chain of accountability and responsibility, the change in the incentives
35 http://www.ohr.int/decisions/mo-hncantdec/default.asp?content_id=5890

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for the local elites and their demand for parallel power structures in order to keep the rents in the country and the extractability alive. Based on these facts and the institutional specica produced by the Dayton agreement and the intervention, the subsequent chapter examines the redistributive implications as the most visible sign of politics.

5.1

Rents

An important specica of the political economy in BiH is the relatively large size of the dierent rents available in the country. A rent can be dened as an item of value that is redistributed and only available due to the fact that trade in the natural equilibrium is disturbed. Common examples for rents are taxes or bribes. The rent does not only not contribute to the productivity in an economy, it even has negative eects on the economic output as it reduces gains from and therefore the incentive to engage in productive sector and produces a deadweight loss that arises due to price and quantity not meeting the natural equilibrium. Rents are necessary in a state, specially in the transition and construction process, due to for example (i) the necessary legal reforms, (ii) the fragility of market institutions and (ii) the unusually greater demand for public goods and social services. [60] Among the reasons for the rents in Bosnia and Herzegovina being and having been relatively high since the end of the war are: The intervention itself, that acts as a demander, supplier and employer. The foreign aid that was donated to the country and had to be distributed. The foreign NGO-funding. The dierent levels of government that preferably traded with the gains from trade. 75 members of the own ethnic group and therefore not maximized

 The informal and parallel structures that allowed for informal market protection and corruption. The complexity of the governmental and bureaucratic system that charge that can be abused for illegal side-contracting. Rent-seeking The easy and large availability of rents reduce the total welfare and the incentive for productive engagement; furthermore the maybe worst eect is the shifted incentive on individual economic actors and the increased attractivity of rent-seeking. People tend to choose the occupation that promises the highest payo with the given talent. The attractiveness of the ocupation is determined, as identied by Murphey, Shleifer and Vishny (2002, pp.53) [115] through: The higher the market size of an industry, the higher the possible payos. Weak diminishing returns on scale in an occupation allow more talented people to spread their abilities over a larger scale Higher protection of the prots in a sector increases security. Almost half of the employed population in BiH are bureaucrats on different levels[47]. Adding the people engaged in NGOs, illegal structures or directly employed in the international institutions, it is reasonable to assume, that the rent-seeking industry has a relatively high proportion in the country. The unusual rents existing in BiH presented above are all just due to either the intervention or the ethnic separation. The base of future protection of the prots from rent seeking therefore essentially relies on the ongoing intervention, whereas the marketing is done via keeping the impression of the ethnic conict that allows ongoing illegal transactions within protected areas[52]. Rent-seeking, as identied by Murphy, Shleifer and Vishny (1993) [92] has increasing returns, as 76

tendentially left higher discretionary power to the bureaucrats in

1. setting up a rent-seeking system may be costly; however after it is set up it is relatively cheap to use, 2. rent-seeking activities provoke the demand for defense, which, in turn, opens the possibility for further growth in rent-seeking, and 3. rent-seekers experience a strength in numbers, as if only few citizens steal or only few bureaucrats are corrupt, the probability of getting caught is high; as the number increases, the likeliness of potential costs like nes are low and returns are higher. The rent-seeking system in Bosnia has its origin in the informal structures that were allready part of the game in Yugoslavia and increased their importance during the war . In post-Dayton Bosnia there was therefore no cost in setting up a rent-seeking system; additionally there has been traditionally a large share of the polpulation that proted from the distribution of rents. The intervention subsequently worsened the rent-seeking incentives to the population. First, there was the neglection of such behaviour, or the naive idea, that a free market will destroy the attractiveness of rent-seeking. In fact the liberalisation, especially the privatisation, opened enormous possibilities for additional rents that the economic actors could compete for. Second, the intervention, as discussed above, created new rents that attracted economic actors, and third the unclear authorities and levels of government led to an increased discretionary power of politicians and bureaucrats and thereby reduced observability and the cost of corrupt behaviour. Taxes The scal sovereignty historically was with the entities only, the Bosnian state has virtually nop independent revenue sources, and ... was ... therefore entirely dependent on transfers from the entities, while defense and national security were similarly entity-level, rather than state-level, responsibilities.[97, p.8] 77

In December 2003 the Parliament of Bosnia and Herzegovina adopted the Law on Indirect Taxation as the base of VAT-taxation on the statelevel. The Indirect Taxation Authority, the biggest state level institution was founded and responsible for tax collecting and unied custom clearance. VAT implementation on the central state level eectively was started in 2006; the international institutions considered that one of key steps towards establishment of single economic space, reduction of the grey economy, foreign investments encouragement and reduction of foreign trade decit.36 The Corporate and Income tax system is however still, though largely unied, under the taxation power of the two entities.

5.2

Public goods

Economic indicators for the rst decade after Dayton showed an ambivalent picture. On the one hand, there was reasonable growth in GDP, Human development index showed a relatively high value for a transforming country and the UN reports expressed the general improvement in health and education. At the same time, the inequality in terms of income, as well as in education and health increased. According to three indexes of social exclusion developed for this NHDR, more than 50 percent .... of the Bosnian population is socially excluded in some way ..., 22 percent face extreme exclusion, and 47 percent of the population are at risk of long-term social exclusion[126, p. 8]. As discussed above, justice is one of the main public goods a state has to supply; without justice, the majority of the population would not accept the legitimacy of the state. Without discussing justice in detail, it is obvious that a country where half the population is socially excluded in some way and almost a quarter are extremely excluded, at least has major problems in supplying justice. In the absence of justice,the population tends not to follow the formal or informal rules of the state; some reasons for the lack of sucient
36 http://www.uino.gov.ba/en/Porezi/

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supply are discussed below.

5.2.1

Decentralisation

BiH is a largely and unevenly decentralized state. The political decisions, which are to be taken on the state level are very limited by the constitution; the fact that even within these narrowly dened elds of central states policy a single veto can block the decision making process leads to de facto no local policy on the state level. If policy is done on the state level, it is often externally imposed by the High Representative. The initial neoliberal idea of state-building might have implied that the level of centralisation would not matter too much, as the governmental competencies would limit and therefore hardly inuence the economic life; the power of the entities might be explainable by the attractiveness of a weak central state. The absence of state-wide political agenda, especially in important elds such as social or economic policy leads to an uneven distribution of the eects, the local policies have on the dierent region. Additionally, development projects expereince a strength in numbers: Setting up big infrastructure projects or fundamentally reforming the tax system lead on the one hand to basic costs, that have to be carried, irrespective of the size of the population (as planning the bridge or designing the tax code). However, as there is no central, coordinating authority, these projects can only be carried out by facing a higher per-capita cost. Even if all these projects would be carried out, as it would be in a central state, meaning the aggregate investment is reached, there is still less incentive for the local governments to invest, as the citizen from other regions that can not be excluded from the public good, are not voters of the authority that initiated and nanced the project. Additionally, the risk is distributed among a fewer amount of projects; if a new bridge over the river Neretva would not bring the desired eect, this loss could not be compensated by the higher than expected success of a bridge over the Drina. 79

5.2.2

Ethnonationalism

The ethnic split goes hand in hand with the decentralisation, as the regional divide is along the ethnic lines. Consequently, regional disparity as a consequence of dierent policies carried out are always ethnic disparities[126, p. 10]. A main feature of public goods is the impossibility to exclude anyone from consuming it. However the nature of public goods or the denition of a public good may allow to discriminate along the ethnic lines. Subsidizing a mosque in Sarajevo will aect the utility of the Bosniaks adversely from the utility of the Serbs or Croats; renewing the road from Visegrad to Serbia, but not from Visegrad to Sarajevo will have higher utility for the Serb population and may further increase the local orientation towards Serbia due to easier transportation. The incentive for the local levels of government to act in an ethnic discriminating way by choosing the public good along the dierent utility that is likely derived from it to the ethnic groups exists due to the ethnically relatively homogenous territories. Tendentially, the politicians therefore choose the public goods they supply according to their ethnic utility eect in contrary to maximizing the utility of the citizen or in a social welfare maximizing manner. 5.2.3 Privatization

Further aspect of the supply of public goods in BiH is the privatization of the supply of public goods and the large share of contracting in the shadow economy. Public goods can be subject to rent-seeking behaviour, as if it is not supplied by the government, it can be substituted by private entrepreneurs that would charge a price and prot from the supply.[52, p. 21] Due to the non-exclusivity of public goods it is necessary that the government does not supply a good at all in order to open the market for private substitutes, as if supplied nobody would buy the good from the entrepreneur. 80

The strong informal ties and the unclear distinction between political and economic elite in the country open the possibility for creating the demand of initially public goods by not supplying it. The ethnic divide enhances the possibility to privatize public goods[52] , as it opens the possibility to gain from private conicts via supplying security, advocacy or bureaucratic decisions to changing demanders. These entrepreneurs are not interested in reaching any public order as it would destroy their markets. Corruption Corruption can be dened as the side contracting of

an agent by consciously abusing her discretionary power granted by a contract with a principal for private gain. The level of corruption in a country as stylized by Klitgaard (1991, p.75)[103] : CORRU P T ION = M ON OP OLY +DISCRET ION

ACCOU N T ABILIT Y

Corruption ourishes when agents have monopoly power over their clients and great discretion in their decisions that aect the clients. As the costs of being corrupt increase with accountability, corruption decreases. Bosnia is ranked 91 out of 178 in the 2010 Corruption Perception Index, only Belarus and Moldova of the European countries are behind BiH. This might be surprising, since corruption is very much in the focus of international institutions as the World Bank or the IMF, esspecially in countries in transition. Remarkably, there is no improvement in the score of around 3 in the 10-digited scheme Transparency International uses. Studies show that corruption is especially widespread on the municipal and cantonal level[40, p. 376], which is explainable with the equation above: On the local levels of government the ethnicity is valued higher - one can be surer, that the bureaucrat in charge is of the right nation, which adds the interethnic trust to the illegal transaction. The bureaucrat 81

or politican who take the decision on this level has most likely the discretion to decide, simply as most of the competencies are on these low level of governance; additionally the sphere of inuence are relatively clear dened here which accounts for the monopoly. Generally, the intervention in Bosnia brought a huge amount of rents to the country that had to be distributed without a functioning legal system without clear property rights and with a bureacratic system and cadre that was used to illegal side contracting due to their experiences in Yugoslavia or during the war. There is often no will by the local elites and no power by the international community in ghting corruption; that leads to the apparatus of orderly government is too often hijacked by political elites who siphon o proceeds from the national treasury and transform government bureaucracies into bribe-collection agencies that impede business[40, p. 376]. Maa Organised crime is by its nature very dicult to study and

quantify, rather anecdotically to catch. Maa, or organised crime is, as the organised implies, not a bunch of bandits; it rather is a system, an enterprise that is based on norms and trust, that demnands its subordinates following these norms and eventually enforces the norms, punishes those who do not follow the rules. The illegal trade is so robust that criminals have built their own private roads around border crossings near Foa and Trebinje[37] writes the Organised Crime and Corruption Reporting Project in an 2008 article about the initiatives to lower the smuggling of tobacco via Bosnia. In fact, Bosnia is in many ways the ideal environment for organised crime. It lies at the heart of a turbulent and unstable region, its borders are porous and its poorly paid ocials easily bought o, and the rule of law barely exists, making the country a low-risk environment for organised criminals. Add to this list the linkages that have developed between 82

organised criminal elements and nationalist elites over the past decade, and it is hardly surprising that organised criminals thrive in Bosnia.[42, p. 368] The criminal enterprises, smugglers and war entrepreneurs had the relation to the formal elites, the knowledge and experience in illegal activities and former soldiers or employees that faced unemployment after the war. Consequently the criminal enterprises changed their key competences and used the uncontrolled, or by them controlable territory and engaged in migrant smuggling, human tracking, drug and arms dealing. Two main mechanisms for the contribution of the international community to the ourishing criminal activities and organisation after the war can be identied[11, pp.49]. First, as allready mentioned above, the arms embargo created the demand for using these networks for the supply of weapons for the ocial political elite. Second, direct humanitarian aid is an easy target for rent-seeking, as the donors, aware of the emergency state of the aid receivers tend to accept the taxation of their deliveries by criminals or are often not in the position to avoid these extractions. Another side eect of the intervention was and is the existence of internationals, in particular soldiers, who are mostly men in the region. The intervention created or increased the demand for prostitutes, which is generally regarded as immoral in the country, irrespective of the religion or nationality. As a former US policewoman with the UNtroops testied,the sta (was) perpetuating the trade by using the brothels, but there were those very specic incidents where people were caught purchasing women outright from the bars, not just going there and buying an hours worth of use.
37

The persistence and size of the maa can be linked to the ethnic ties and connections that favours ethnic protection and prevent eective ghting them, the interest of major players in local politics in keeping

37 Citation from http://www.telegraph.co.uk/culture/culturevideo/booksvideo/8303161/Kathyrn Bolkovac-interview-with-the-original-Whistleblower.html The interviewed is the base of the story of the movie The Whistleblower, a 2011 lm

83

the scheme alive and the unability of the international community to ght it due to the lack of personell and incomplete information. Shadow Economy While the last two paragraphs of this section

dealt with the privatisation of public goods and rent seeking behaviour, which both have obviously negative implications on economic development, this paragraph discusses the private contracting, where the substance of the contract per se is not illegal, but only the fact that the contract is not registered, the prots not taxed, makes the transaction illegal. Schneider (2002)[112] denes the shadow economy as the aggregated unreported income from the production of legal goods and services, either from monetary or barter transactions - hence all economic activities which would generally be taxable were they reported to the state (tax) authorities. A straigthforward explanation to the existence and size of the shadow economy would be that taxpayers expect something in return for their contribution to the public budget. States that do not suciently supply public goods may typically experience more tax evasion and a higher share of shadow economy. As presented here, there are many mechanisms that distribute the taxpayers money not into welfare maximizing initiatives, but into the pocket of the elites. The share of the shadow economy of the GNP of Bosnia in 1999/2000 was estimated at 34%[112], which is below the average of transition countries of that time. Shadow economy has the obvious eect of lowering the taxable income in the country; however it might have a positive eect of the economic development, as it allows trading closer to the natural equilibrium, as no taxes, bribes or protection money has to be sold. Trade that would not be legally possible, can happen in the shadow economy. The shadow economy has to be seen connected with the large part[52, p. 29] of the population that are neither formally employed nor prot from the maa or other rent seeking schemes and who use subsistence agriculture to stay out of poverty. 84

In this respect the international initiatives to ght the shadow economy seem extremely paradox, especially given the neoliberal touch Policies that add to social stress and reliance on crime are legitimzed, while economic survival through shadow economic activity is criminalized.[100, p. 150] An answer might be the dierent interest groups: while shadow economy is left to the ordinary population, the elites prot form the bigsized illegal schemes as the maa or corruption; in an ethnically divided country it is easier for the High Representative to nd an agreement among the local elites when it comes to ghting shadow economy, as about ghting corruption, as this is a remarkable source of income for them. 5.2.4 Internationalisation

The intervention per se lead to rents in the country; maybe most important are the donation form international institutions as the World Bank, but the international bureaus also employ, demand, rent space and sent a signicant amount of expatriated with a comparably high salary to the country. A common problem of the donations of IMF or the European Union is their emphasizing large infrastructural projects which have relatively long gestation periods and are capital-intensive, not employmentgenerating[126]So, while the infrastructure is built, the project-oriented character of the external nancing does not add any additional value (besides the existing infrastructure) as it does not transfer considerable knowledge to the country and as it does not increase the competitiveness of local companies. Foreign donations lead, as the donor regularly has to agree with the purpose of nancing and the receiver does not bear the (total) costs of a project, often to not using the funds in the social welfare maximizing way. Projects may be favoured by the local elites if they can prot from them personally, as, for example, a main supplier or a contractor in a building project. On the other side, the supply side of international 85

nancing, the donor may follow an agenda and favour projects of a certain kind; additionally, the internationals may lack the information about what is needed the most in the country and who prots from a project. The utility of the bureaucrats in charge of distributing the funds to some degree depends on the satisfaction of their principals, which could lead to conducting prestigous projects, that can be used politically by their principals (as rebuilding the Old Bridge in Mostar) rather than small-scale regional projects without possibility to market it. The International community additionally leads to higher imports, which reduce entrepreneural possibilities of local companies, as their demand lead to economics of scales, reduce the cost and risk for exporting to Bosnia. Contracting with local companies, without control of the market, has developed as a mechanism of transfering the international nancing to the rent income of the local elites.[52, p. 28]

Empirical Insights

The previous chapters examined the theory of the impact of the ethnical division and the international intervention on the political and economic life in Bosnia and Herzegovina. The main hypothesis is that the international community fails in reaching their main goals because it produces adverse incentives to the local elites. Democratic development is hindered by the power of the High Representative, which contradicts the basic idea of democracy and due to the undemocratic nature of the constitution that focuses on the equality and the power of the ethnic nations, not of the citizens. The economic development, the implementation of a free market lags behind due to the intiatives of the international community, that largely ignores the rent-seeking behavior it produces. The ethnic divide and the international engagement in the country has become valuable to the local elites; dramatizing ethnic conict and marketing it to the population and the internationals has 86

become part of the rent seeking game. These theoretical approaches are hardly provable empirically. On the macro-level, there is no country in a comparable position to Bosnia; the tripple transformation from war to peace, communist to capitalist economic system and authocracy to democracy followed by a de-facto protectorate with ethnic division and the foundation of a heavily decentralized state; additionally the large size of the intervention on multiple levels in a country that is economically relatively backward, though having a highly educated population and high social standards is probably unique. Comparisons to other protectorates as East-Timor, the Kosovo or Iraq many, as well as intraregional comparisons, add some explanatory power; however there will be tremendous questions left open. On the micro-level, there will be hardly any evidence about the rentseeking motives of the local elites, as they are hidden and mostly have to be hidden by their very nature. Some explanations may be possible by interpreting the actions of the local politicians and the internationals in the country or by analysing the development of indices as the CPI or the climate for doing business over time. In the following, some aspects that are (strong) signs for the theories developped in this work are presented.

6.1

Entry protections

Theory Djankov et al. give evidence that countries with heavier regulation of entry have higher corruption and larger unocial economies, but not better quality of public or private goods. Countries with more democratic and limited governments have lighter regulation of entry.[41]Higher entry regulations lead to the possibility to extract bribes from the enterprises existing in the economy, as their prots are higher due to the protection and from companies that would eventually enter the market by oering a reduction of the complexity of the regulation process or 87

faster treatment. In terms of causality, these two eects enforce each other: a high level of entry regulation leads to corruption which may become a substantial industry, that needs further entry regulations to grow. Initiatives Creating a business-friendly environment in the country has ever since been a top priority of the international community . Maybe most remarkable, Paddy Ashdowns Bulldozer intiative of 50 economic reforms carried out within 150 days. The bulldozer presumably stands for the speed and the force used to carry out the reforms. Bulldozer-like is also the High Representatives foreword in the Bulldozer Brochure[93]: I used to work in the private sector, so I know what it takes. (....) So when the businesspeople of BiH expressed a desire to do something to improve the conditions in which they run their companies, I was happy to answer their call and to help set up the Bulldozer Committee. (....) No other country, as far as I know, has ever attempted an eort as ambitious and specic as that undertaken by the Bulldozer Committee - to enact 50 economic reforms in 150 days. One reform every three days! This is a remarkable initiative. I commend it unreservedly. I also commend the BiH political leadership, which has so far responded so positively to the reforms put forward by the Bulldozer Committee. Reducing red tape and regulation would stimulate economic growth and that would reduce poverty, create jobs, bring more tax revenue to the authorities, boost exports reduce the administrative burden and reduce the grey economy. This initiative, combined with growth in remittances, renewal of the ow of credit, and a successful round of privatization of state-owned enterprises, restarted domestic consumption and encouraged sustained economic growth.[28, p. 105] 88

Reducing corruption via the legislation was also on the agenda of Lord Ashdown, as i.e. his decisions of March 6, 2003, enacting the Law on Gifts of the Republika Srpska and the Federation38 show. The initiatives however had a common feature, as they are all to some extent reduceable to deregulation and the reduction of red tape and corruption: While the majority of the population may benet, the actors currently beneting from the existing structures and regulations would be worse o afterwards. Corruption A generally accepted and widely used measure is how-

ever the Corruption Perceptions Index (CPI), a poll of polls that has been rst published at the University of Passau in 1995 and became popular in scientic work on corruption. The goal of the CPI is to provide data on extensive perceptions of corruption within countries. The CPI is a composite index, making use of surveys of business people and assessments by country analysts. It consists of credible sources using diverse sampling frames and dierent methodologies........ The goal of the Index is to examine the degree to which corruption is perceived to exist among public ocials and politicians (www.transparency.org) The CPI, as the name predicts, is an indicator for perceived corruption, which is by denition subjective.

Table 10: CPI in the region CPI 2003 2005 2010 Bosnia 3,3 2,9 3,2 Serbia 2,3 2,8 3,5 Croatia 3,7 3,4 4,1 Source: transparency.org

While in the neighbouring countries Serbia and Croatia the level of perceived corruption was reduced signicantly, Bosnia stayed in the
38 http://www.ohr.int/decisions/econdec/default.asp?content_id=30017 http://www.ohr.int/decisions/econdec/default.asp?content_id=30016

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period 2003-2010 largely on the same level; totally the CPI decreased even a little in the period 2003-2010, while corruption generally reduced in the (former) transformation countries of South-Eastern and Eastern Europe. The 2010 survey ranked among the European countries only the former Soviet republics of the Ukraine (2,4), Belarus (2,5), Russia (2,1) and Moldova (2,9) behind Bosnia and Herzegovina. The high explanatory power of legal origin and the signicant inuence of long-lasting soviet rule[87, p. 76] on CPI, when controling for HDI or GDP, worsen the obvious fact of BiH as the European country with the highest level of perceived corruption despite territory of the former Soviet Union. Red Tape While corruption is illegal and mostly hidden, red tape,

though as presented above it allows for corrupt behaviour is per se not forbidden. Regulations are necessary in the same degree as the state is necessary; regulations may increase public welfare and stipulate growth as i.e. they set a legal framework and strengthen property rights. However, the former socialist countries were tendentially overregulated, the Bulldozer intitative aimed on reducing the burdens. The World Bank doing business index promotes deregulation and is composed by easy-to-understand regulatory burdens for business operations. The benet of ease of starting a business is the lower protection of the market and the higher exibility for entrepreneurs.

While all countries as presented above reduced the bureaucratic procedures when opening a business, as exemplatory shown above, the time required to start a business and the necessary procedures to start a business, Bosnia largely kept the 2003 status. The time required to start a business in 2010 were 55 days in BiH, while in the other countries in the region it needed between 3 and 13 days to register a company. Only the other protectorate in the region, 90

Figure 6.1: Time required to start a business

the Kosovo had a comparably high number as BiH. The development of all countries shows a signicant decline in the 2003-2010 period; Serbia or Macedonia were on the same level as BiH until 2004 but dramatically reduced the time to set up a business.

Table 11: Start-up procedures to register a business (number) 2003 2005 2006 2008 2010 development Albania 11 11 11 6 5 -6 BiH 12 12 12 12 12 0 Croatia 11 11 9 7 6 -5 Macedonia 13 13 10 7 3 -10 Serbia 12 11 11 11 7 -5

Also the necessary procedures to set up a business, by nature closely linked to the time required, did not decrease in BiH, whereas it decreased almost by half in the other countries in the region. While the procedures are legally dened, the time necessary to start business operation is to some degree in the discretionary power of the bureaucrats in charge. As both numbers did not decline signicantly, this is a sign of unwillingness of the political as well as the bureaucratic elites to reduce the burdens of future entrepreneurs. 91

Foreign Direct Investment The attractiveness of an investment is determined by its rentability and the risk that is attached to the future cash ows. Rational investors weight the risk with the prots when taking an investment decisison. Consequently, when attractTable 12: GDP 2001-2009 Year GDP growth (%) 2000 2001 2002 2003 2004 2005 2006 2007 2008 5,50 4,40 5,30 4,00 6,10 5,00 6,20 6,84 5,42 ing Foreign Direct Investments, the future prots, largely dependent on GDP growth and not directly inuencable by the governments, are given and the rationale must be to reduce the risk. Red Tape and corruption, unclear property rights and problems in enforcing contracts are among the major risks that foreign investors face when investing. The Bulldozer initiative included major initatives to attract

2009 -2,91 source: World Bank

FDI, as simlplyng registration procedures or removing the need for registration of foreign representative oce in both entities. An answer on whether these intitiatives were successfull might be the market, who is, as the initiatiors of the Bulldozer initiative might have thought, always right.

In fact, there was an increase in FDI to over half a billion USD in 2004 and a major increase in 2007, which is mainly thanks to the privatization of certain large state-owned enterprises. FDI inow in 2008, without the expected privatization, can be considered as satisfactory, especially if we take into account its positive structure (investment in production sector and high contribution of Greeneld investments). 39
39 http://www.pa.gov.ba/page.asp?id=23

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Figure 6.2: FDI inow BiH

Source: Central Bank of BiH ; Foreign Investment Promotion Agency http://www.pa.gov.ba/page.asp?id=23

Figure 6.3: FDI Inows per Capita

Compared to other countries in the region, BiH had the lowest FDI inow in 2009, when the economic crisis hit the FDIs in all countries. The FDI per capita of USD 262 in Serbia and USD 666 in Croatia are in 2009 and have almost ever since been far higher than Bosnias USD 66. While there has improvement in the FDI in the country, BiH obviously still does not reach the full potential; a reason for that might be the relative political and legal insecurity and instability and the 93

protectionsim that increase the risk of doing business in the country.

6.2

When the Bonn Powers are used

The usage of the so-called Bonn Powers, the interpretation of the Dayton Peace Agreement in a way that ensures the last say in any decision resting with the high representative, may provide insights on the motivations of the national elites in the country. As the closing of the OHR and the transfer of authority to the Bosnians has ever since been the nal goal of the engagement, the Bonn Powers tend to be used only when there is, in the view of the HR, a violation of the Dayton Peace Agreement that will not be solved by the local governments. Consequently, there has to be some conict of interest. While the OHR bears the responsibility for his decisions alone, local decisions are normally made in an assembly, which reduces the personal responsibilty of the single delegate; the OHRs decisions will furthermore be subject of discussion in the Bosnian media, which increase the cost of his decision making. There are few possibilities for the HR to personally gain from his decisions, in contrary, the local politicians can maximize their personal prot via producing extractable rents and maximize their job-security via ethnonationalistic policy. For the purpose of this work it may therefore provide some evidence of the disturbed redistribution, if there are decisions aimed to prevent protective markets or distribution of funds to individuals or ethnonational spheres of inuence. However, the prior actions that led to the decision, still have to be interpreted, whether the prime motive is nationalistic strengthening or rent-seeking. As per June 2011 there were a total of 914 ocial decisions referring to the Bonn Powers issued by the High Representative. Ashdown acted as the most interventionist OHR with a total of 447 decisions issued. On the 30.06 and 01.07.2004 he issued a total of 62 decisions, each removing a Serbian ocial from public and party positions held at the time due to being culpable for contributing to the institutional failure to purge from the political landscape of conditions conducive to 94

the provision of material support and sustenance to individuals indicted under Article 19, as aforesaid. Such failings are inimical to stability and the rule of law. 40

The level of intervention decreased after Paddy Ashdowns term ended; the current decisions often undo the bans from holding ocial positiions imposed by prior OHRs. In extracting some evidence, especially the Decisions in the Economic Field, Removals and Suspensions from Oce and Decisions in the eld of Property Laws, Return of Displaced Persons and Refugees and Reconciliation are of interest. Removals from oce Removals from oce are mostly justied in the decisions as the removed person disregards the General Framework Peace Agreement and the Constitution of Bosnia and Herzegovina, publicly challenges the High Representatives decision or attempts to obstruct the implementation of the General Framework Agreement for Peace. On the highest levels of local politics, Mr. Nikola Poplasen was removed from the Oce of President of Republika Srpska on March 5, 1999 and Mr. Ante Jelavic was removed from his position as the Croat member of the BiH Presidency. Mr. Poplasen, the rst and only Serbian Radical Party of the Republika Srpska president, was removed due to blocking the decision making within the assembly of the Republika Srpska. The removal of Mr. Jelavic was reasoned by undermining the constitutional order of the Federation of Bosnia and Herzegovina and Bosnia and Herzegovina and establish an illegal parallel structure. He had, according to the decision, organised and promoted a political demonstration on election day designed to interfere with the normal democratic process, ignored court decisions on the legitimacy of HR
40 www.ohr.int

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Table 13: Decisions per OHR Inzko Lajk Schwarz Ashdown Petritsch Economic Field 2 3 12 35 36 Judicial Reform 3 8 20 128 20 Property 2 10 10 18 58 War Crimes 6 5 104 Symbols 12 2 3 58 27 FBiH 6 5 41 16 Media 1 14 Removals 16 3 17 62 79 Total decisions 47 31 67 447 250 Avg. p.m. 1,75 1,47 3,90 9,98 7,41 Symbols: State Symbols, State-Level Matters and Const. Issues Property: Property Laws, Return of Displaced Persons, Refuge FBiH: Federation, Mostar and H-N Canton Removals: Removals and Suspensions Media: Media Restructuring Avg. p.m.:Avg. decisions per month

Westendorp 9 3 22 12 9 3 14 72 2,73

Total 97 182 120 115 114 77 18 191 914 -

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decisions and dishonoured the Presidency of Bosnia and Herzegovina as a whole. His activities indicated, as the decision stresses, that he will ignore the door left open to him to resume conducting political activity within and not outside the established constitutional framework of this country. After his removal, Mr. Jelavic had to appear before a court in Sarajevo, charged over the attempt to create an autonomous Croat mini-state within Bosnia. 41 The reasons for the Anti-Dayton actions might have been either irrational nationalism or rational utility maximisation. Assuming the prior threats by the HR to remove Mr. Jelavic from BiH presidency, the strategy he followed might not have been the job-security maximisation. Parallel power structures and the ignorance of the legitimacy of the Dayton-institutions lead however to more relative power of the politicians in the Croat part of the Federation. In 2005 Mr. Jelavic again had to appear before a court, as he was accused of abuse of oce, embazzlement in the oce, lack of commitment in oce and tax evasion. He was charged In absence42 with a total of ten years of imprisonment, mainly due to his abuse of oce when extracted Bosnian funds ,partly for nacing Croatian paramilitary and his party, HDZ BiH, but also and for his personal gain when acting as minister of defense ind inuencing the newly found Herzegovina Insurance and Bank. In an interview with the Croatian weekly Globus in 2001, Petritsch said that several hundred million dollars had been illegally tunneled through the bank to HDZ. 43 The verdict Concludes: The facts regarding the establishment of the Bank and Herzegvina Osiguranje and the facts relating to the cash withdrawals and the mandate loans establish, beyond a reasonable doubt, that during the Defendants ministry, there
41 http://news.bbc.co.uk/2/hi/europe/1515447.stm 42 The

arrested.html

43 http://www.tol.org/client/article/11490-inuential-bosnian-croat-trio-

verdict was later revoked due to formal reasons

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was a well organized operation being carried out within the Federation Ministry of Defense whose goal was the unjust enrichment of persons and institutions connected with the HVO and the HDZ using public monies .... The illegal transfer of funds to persons may be a sign, that the greed was a main motive of the illegal extraction of funds. Had the actions of Mr. Jelavic when trying to establish parallel structures been successfull, there would have been even more possibilities to extract fund for himself and the institutions around him; additionaly, the stronger framework would have protected him possibly more successfull from the prosecution. Another prominent removal was the removal of Mr. Edhem Bicakcic, former Prime Minister of the Federation as Director of Elektroprivreda, dated February 2, 2001. The decision accused him of abusing his prior position as he: Created a Federal Employment Agency without a legal base and subsequently transferred a total of KM 24 mio. to the agency, out of wich KM 1 mio. was distributed as loans to companies. As the loans were written o shortly afterwards, the transfer was pure extraction of funds. Transfered KM 825k to a veterans association, that used the funds for capitalisation of a private bank. 2.5 mio. of public funds there. Created a bank account at his sole discretion and transfered DM Issued a decision to waive accusion agains smugglers. As corrupt politicians exist probably to some extent everywhere, this case might at the rst glance not show any specica of the Bosnian political reality. A major dierence is however, that in normal democracies, based on the rule of law, the electoral process would lead to enough pressure on the accused politician or his party to step back from public oces. In Bosnia however, there is no eective opposition policy, as the 98

ethnicity is the main criteria of voting. The absence of this guarding function and political competition leads to the discretionary power of the single politician to abuse his oce in so many severe causes and to the continuance of corruption and corrupt politicians in the oce. In BiH, the High Representative has to use his powers, substitutes the opposition, to ban corrupt politicans from holding public oces.

Outlook and Conclusions

Bosnia and Hercegovina is formally a democratic state, the economy based on the free market; these principles could have guaranteed a fast transformation to a western-styled country. However, as this thesis argues, in many ways, while formally based on these western principles, the process of economic transformation, that shall resut in a proper divide of politics and economy, is heavily and adversly inuenced by the particular interests of the ethnically divided elites. As their status, their income and wealth depends on the ethnic divide, there is no incentive in reducing the conict. Additionally the international intervention leads to non-productive rents in the country, that change the production function and result in the possibility to extract a part of this rent. Politically, the High Representative as the last power in every decission making in the country is the perfect scape-goat for the local politicians. The current status has become a valuable thing for the elites, irrespective of the ethnicity. The Dayton Peace Agreement might be undemocratic and unjust the adressee of the constitution is the ethnic nations, not the citizen; however its most important feature is that it simply does not work. The problems of the country are most likely well known by the international bureaucrats and politicians; however there is no simple solution that would not lead to at least one group being worse o. The Prime Minister of Republika Srpska intended to hold a referendum on the secession of the entity from BiH in early 2011. After heavy 99

intervention of the European Union the referendum was cancelled. Two questions arise: wether he really expected the international community to accept this referendum after 15 years of heavy involvement, mainly to secure the entity; if not, than his action was populistic, to keep the conct alive and gain politically from his actions. Another question would be, if the referendum would be held, and a majority would have voted for the secession - why should any international body have the right to deny to the Bosnian Serbs what they allowed the people of Monternegro or the Kosovo. Is the country not undemocratic if a majority of an ethnically relatively homogenous territory that inhabits over 40% of the population decides to seceed? If not undemocratic, the country at least is far from legitimate- a proportion of a third of the citizen that do not agree with the entity will lead to not governable country. The consequence of the theory of this work is however, that the conict and the intervention per se is at the moment valuable; that would not mean that the people do not agree with the entity. It is rather a part of the post-Dayton ethnic game, which is a very rational one, to be for secession if you are a Serb and to be for a stronger central state if you are a Bosniac. Questioning the entity and discussing the intervention has since 15 years dominated internal politics in BiH. The original main goal of the intervention is to secure the entity, while the shifted incentives of the elites lead to the main goal of the entity being to secure the intervention. Irrespective of the point of view, after almost twenty years of interening in the internal politics, 15 of them during peace time, the only advise to the international policy makers can be to leave the citizen of Bosnia and Hercegovina alone; the intervention has failed, now it has to be up to the local and the internationals have to let them develop a strong state, a democratic state. A state with a natural democratic chain of responsibility. Ending the intervention would mean a large part of the unproductive economy may vanish, the political responsibility would rest with 100

the locals only; indirectly, as there would not be any value of the ethnonational split, the elites would be forced to cooperate, the ethnic divide would eventually be overcome.

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Abstract
This work is on the core problems of Bosnia and Hercegovina when it comes to economic and political transformation. Historical burdens from Yugoslavia and the war following the countries breakup, especially the ethnonational split were not overecome after the Dayton Peace Agreement; in contrary- the divide was formalized as the highest maxime of Bosnia and Hercegovina as a country. Additionally the international community has built up a heavy presence in the country, intervening directly and indirectly, on purpose and without in the political and economic life in the country. In combination these two eects have summed up over the last one-and-a-half decades to the current status in Bosnia: The ethnonational principle shifted the incentives of the elites on lobbying for their own nation. The rational Serbian voter will under the current constitutional layout - always vote for the most radical Serbian politician, simply as the ethnicity is the criteria along which the public goods are distributed. In Bosnia additionally the natural Principal-Agent relation as it is in democracies is disturbed. The politicians that shall act as a principal in leading the country, have in many aspects transformed to agents of the international community. The natural democratic chain of responsibility is therefore not secured. In fact the principals in Brussels, New York or elsewhere do actually lack the incentives as well as the information in order to implement a stable and secure market economy. The local elites as well as the international actors have learned to deal with the situation in Bosnia. In fact the constant conict has become a valuable thing to the local elites, as their resources, positions and economic power often heavily depends on the complex layout and the political split. Questioning the entity and discussing the intervention has since 15 years dominated internal politics in BiH. The original main goal of the intervention is to secure the entity, while the shifted incentives of the elites lead to the main goal of the entity being to secure the intervention. 114

115

Abstrakt
Diese Arbeit diskutiert die Grundprobleme der politischen und konomischen Transformation in Bosnien und Herzegovina. Der historische Ballast aus den Zeiten Jugoslawiens und der Krieg, der auf den Zusammenbruch des Staates folgte, im Speziellen die Ethnonationale Komponente wurden im Zuge des Dayton Friedensabkommens nicht bereinigt; im Gegenteil: diese ethnonationale Trennung wurde zur hchsten Maxime des jungen Staates erklrt. nicht . Darber hinaus baute die internationale Gemeinschaft ihre starke Prsenz im Lande aus und begann direkt und indirekt, absichtlich und unabsichtlich im politischen und konomischen Leben des Landes zu intervenieren. Die Kombination dieser zwei Eekte fhrt ber die letzten 15 Jahre zum momentanen Status in Bosnien: Der ethnonationale Split verschob die Anreize fr die Eliten dahingehend, mglichst fr die eigene Ethnie zu lobbyieren. Der rationale serbische Whler wird unter der momentanen Verfassung immer den radikalsten serbischen Politiker Whlen, da die Verteilung der entlichen Gter immer nach ethnischen Kriterien erfolgt. In Bosnien ist darber hinaus die natrlich-demokratische PrincipalAgent Beziehung gestrt. Ein bosnischer Politiker ist in vielen Fllen ein Agent der internationalen Gemeinschaft, was zur Folge hat, dass die eigene Politik viel weniger beobachtbar wird und die internationale Gemeinschaft als interner Sndenbock missbraucht werden kann. Die natrliche demokratische Wechselwirkung zwischen Macht und Wahlen ist gestrt. Tatschlich mangelt es einem ein Prinzipal, etwa in Brssel oder New York sowohl am Anreiz als auch der Informationen um einen stabilen und sicheren, auf Marktwirtschaft basierenden demokratischen Staat zu implementieren. Die lokalen Eliten wie auch die internationalen Akteure haben gelernt mit der Situation in Bosnien umzugehen. Tatschlich ist der andauernde Konikt zu einer wertvollen Anlage fr die lokalen Eliten geworden, da ihre Macht, ihre Positionen und ihr Ressourcenzugang am komplexen staatlichen Layout und dem politischen Split basiert. Diskussionen ber die Legitimitt der Einheit haben die bosnische 116

Innenpolitik ber die letzten 15 Jahre dominiert. Der eigentliche Zweck der Intervention war die Einheit zu sichern, whrend mittlerweile der Sinn der Einheit bis zu einem gewissen Grad darin besteht, die Intervention zu sichern.

117