2009 Index of Economic Freedom

Quick Facts

Population:

• 3.8 million

GDP (PPP):

• $25.5 billion
• 6.2% growth
• 5.1% 5-year compound annual growth
• $6488 per capita

Unemployment:

• 45.5%

Inflation (CPI):

• 1.3%

FDI Inflow:

• $423.2 million

Bosnia and Herzegovina's economic freedom score is 53.1, making its economy the 134th freest in the 2009 Index. Its overall score is 0.8 point lower than last year. Bosnia and Herzegovina is ranked 40th freest among the 43 countries in the Europe region, and its overall score is well below the regional average.

Bosnia and Herzegovina's trade freedom and monetary freedom scores are slightly higher than the global average. Economic development was initially helped by reconstruction efforts, but international trade has been a major source of economic growth. Exports have grown at an average annual rate of about 20 percent for a decade. Moderate inflation has also contributed to economic expansion. With the banking sector relatively modernized, financial-sector reforms have been significant.

Inefficient and high government spending, weak property rights, and widespread corruption hold down overall economic freedom, however, and discourage entrepreneurial activity. As a result of sluggish privatization of state-owned enterprises, the private sector's contribution to GDP has grown rather slowly. Bureaucratic and non-transparent regulatory systems remain a problem for foreign investors and domestic entrepreneurs. Fiscal coordination remains weak despite adoption of a law establishing a National Fiscal Council in early 2008.

Background Back to the top

The 1995 Dayton Agreement ended three years of fighting and finalized Bosnia–Herzegovina’s secession from the former Yugoslavia. Under a loose central government, two separate entities exist along ethnic lines: the Republika Srpska (Serbian) and the Federation of Bosnia and Herzegovina (Muslim/Croat). The rule of law is weak, and local courts are subject to substantial political interference and lack the resources to prosecute complex crimes. The state’s intrusive bureaucracy and costly registration procedures reflect a history of central planning. The economy relies heavily on agriculture. Integration into the international community remains a priority, and the European Union’s Commissioner for Enlargement finally initialed a Stabilization and Association Agreement with Bosnia and Herzegovina in December 2007 as a preliminary step toward EU membership.

Business Freedom 59.9 Back to the top

The overall freedom to start, operate, and close a business is limited by Bosnia and Herzegovina's national regulatory environment. Starting a business takes an average of 60 days, compared to the world average of 38 days. Obtaining a business license takes more than the world average of 225 days.

Trade Freedom 77.2 Back to the top

Bosnia and Herzegovina's weighted average tariff rate was 6.4 percent in 2006. Some import and export restrictions, non-transparent government procurement, additional import duties on agriculture products, and numerous border fees add to the cost of trade. The enforcement of intellectual property rights remains problematic. Ten points were deducted from Bosnia and Herzegovina's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 71.8 Back to the top

Bosnia and Herzegovina's various governing entities have different tax policies. The top income tax rate can be as high as 15 percent, and the top corporate tax rate is 30 percent. Other taxes include a value-added tax (VAT), a sales tax, and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 41.2 percent.

Government Size 37.6 Back to the top

Total government expenditures, including consumption and transfer payments, are high. In the most recent year, government spending equaled 45.6 percent of GDP. In May 2008, the government announced plans to divest its majority shares in two telecommunications entities, maintaining a 25 percent stake in each company. Similar plans failed in the past because of political fighting.

Monetary Freedom79.0 Back to the top

Inflation is moderate, averaging 3.0 percent between 2005 and 2007. Price controls apply to electricity, gas, and telecommunications services. Ten points were deducted from Bosnia and Herzegovina's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom50.0 Back to the top

The law accords foreign investors the same rights as domestic investors. With the exception of armaments and media, where foreign control is limited to 49 percent, there are no restrictions on investment. The Law on Foreign Direct Investment guarantees the immediate right to transfer and repatriate profits and remittances and permits local and foreign companies to hold accounts in one or more banks authorized to initiate or receive payments in foreign currency. There are few restrictions on capital transactions and foreign exchange accounts. The law prohibits expropriation and nationalization of assets, except under special circumstances and with due compensation.

Financial Freedom60.0 Back to the top

The banking system used to be dominated by large state-owned banks that were severely burdened with non-performing loans but has expanded quickly in recent years, and consolidation and privatization have followed. Most banks are now in private hands, accounting for more than 80 percent of banking capital, and provide easy access to capital and a full range of banking services. However, long-term lending is still hindered by insufficient enforcement of contracts and the poor regulatory environment. The central bank has attempted to consolidate financial oversight, but the process has stalled. Each region has an underdeveloped but growing non-bank financial sector and a small stock exchange. There are no restrictions on payments and transfers related to international current and capital transactions.

Property Rights10.0 Back to the top

Property registers are largely unreliable, leaving property transfers open to dispute. The judicial system does not cover commercial activities adequately. Court decisions are difficult to enforce. Contracts are almost unenforceable, and the implementation of laws protecting intellectual property rights is inadequate.

Freedom From Corruption33.0 Back to the top

Corruption is perceived as widespread. Bosnia and Herzegovina ranks 84th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Judges typically request bribes and respond to pressure from public officials. The business registration and licensing process is particularly vulnerable to corruption.

Labor Freedom52.1 Back to the top

The labor market operates under relatively inflexible employment regulations that hinder employment creation and productivity growth. The non-salary cost of employing a worker is moderate, but an inflexible wage determination system hinders job creation and worker mobility.