Bosnia and Herzegovina 2001-2004: Enterprise Restructuring, Labor Market Transitions and Poverty<sup>2</sup>

# **I. Introduction**

A large empirical literature has emerged in recent years on the economic benefits and consequences of the transition from centrally planned to market economies. Some of these empirical studies were an effort to understand the impact of structural and policy reforms on economic output at a fairly broad level (e.g., Selowsky and Martin 1997), with some focusing on reform reversals and their impact on economic activity (e.g., Merlevede 2003) or some recent studies revisiting and claiming to overturn some of the findings of the “first generation” of studies regarding the benefits of certain reform programs (Godoy and Stiglitz 2006). Others have examined the consequences of reform much more narrowly and at the microeconomic level, focusing, for example, on the employment and productivity consequences of privatization and enterprise restructuring. Much of what we know in this area is drawn from the experience of displaced workers in countries undergoing rapid reform. Relatively less is known of stalled or incomplete reform and the impact on local labor markets. Bosnia and Herzegovina represent one such case.

Bosnia and Herzegovina has achieved significant progress in economic reconstruction and recovery since the 1995 Dayton Peace Agreement, supported by substantial volumes of international financial assistance. The GDP and merchandise exports have steadily been increasing, fiscal accounts have improved, domestic demand has been strengthening, and inflation rates have been modest. The country has experienced relative social and political stability while gradually working toward state building. On structural reforms underpinning the transition to a market economy, however, Bosnia and Herzegovina’s progress has been relatively uneven. On some fronts, such as financial sector reform, some progress has been made. With respect to privatization and enterprise restructuring, as well as private sector contributions to GDP, however, the country lags many of its neighbors in the region. This has clear implications for local job creation, labor market outcomes, and poverty. However, little is known in the empirical literature on labor market developments in Bosnia and Herzegovina.

This paper takes stock of labor market developments in Bosnia and Herzegovina (BH) over 2001 to 2004, using the panel Living Standards Measurement Study

> 2 This paper was prepared under the World Bank’s 2005 Bosnia and Herzegovina Programmatic Poverty Assessment with support from central PSIA funds. We are grateful to the EPPU/DEP and DFID for supporting the LSMS/Living in BH panel survey, Fahrudin Memic (EPPU) for providing data on welfare/poverty based on the LSMS, and Tarik Sahovic (ECSPF) for providing summary information on the financial conditions of a sample of firms in the RS. Valuable comments and suggestions were received from Asad Alam, Christian Bodewig, Jean Fares, Csaba Feher, Ardo Hansson, Zlatko Hurtic, Ivailo Izvorski, Toby Linden, Maniza B. Naqvi, Stefano Paternostro, Zafiris Tzannatos, Milan Vodopivec, and Penny Williams at various stages of the analysis. The usual disclaimer applies.

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