Bosnia and Herzegovina reopens for business

After 10 years, the Mostar bridge is to reopen, linking the city's Christian Croatian and Muslim Bosnian populations once more.

But, with financial support provided by a $15 million World Bank loan, the crossing has been rebuilt. An official opening ceremony will take place on July 24, which the BH government hopes will attract the attention of tourists and foreign investors. As Ian Cliff, British ambassador to BH, says: "The ultimate symbol of despair in the war was the destruction of the bridge, so the reconstruction of it is a very important symbol that BH is back in business."

BH is clearly at a watershed, a change from one era to another marked by the death at the end of last year of Alija Izetbegovic, the war-time president of Bosnia; the continuing trial of Slobodan Milosevic; and the sentencing in December of Dragan Obrenovic, the Serbian commander responsible for the Srebrenica massacre. The challenges ahead of it, to take increasing responsibility for its reforms, cope with its debt crisis, catch up with its neighbours in economic growth, and eventually accede to the EU, are great. But the country looks more likely to rise to these challenges than it has at any time in the past decade.

The country needs to get that message across fast. As Peter Nicholl, BH's New Zealand-born central bank governor, says: "The region as a whole is moving very rapidly, and BH is in real danger of falling behind." Indeed, southeastern Europe is one of the fastest-growing emerging-market regions. The regional average for GDP growth was 4.6% in 2002, and Croatia's economy grew by 5.2%. BH's growth was only 3.8%, far below the 6% Nicholl says he would like to see.

BH is even trailing Serbia, which was also battered by war. Serbia is aiming to raise about e1.3 billion in foreign direct investment (FDI) this year, mainly from privatization proceeds. BH's FDI doubled in 2002 to about e300 million, but as Nicholl said when Euromoney met him at a regional conference in Dubrovnik: "I thought we were doing pretty well until I heard some of the figures other countries are producing."

The danger, says Franz Friedl, general director of HVB Banka BiH, is that while the rest of the region accedes to the EU and reaps the economic benefits, BH will become "the forgotten child of Europe". He says: "There is a window of opportunity, for BH and for central and eastern Europe as a whole, to attract foreign capital while other emerging markets are in recession. But that window is closing, and we have maybe a year or two more." Nicholl says: "The country is running out of time. But Bosnian politicians don't always realize this."

The country is still riven by deep political divisions. As a result it is still controlled by the international community, through the office of the high representative (OHR). It is run by former UK politician Paddy Ashdown and has extraordinary powers to impose laws on the BH legislature and to veto others. Donald Hays, the deputy high representative, says: "It's a tremendous amount of power, which wouldn't have to be used if there was a consensus government in the country that could restrain its mayors, its governors, its police representatives themselves. But they don't have that power yet, because they haven't built a political consensus in the country."

Richard McGuire, senior economist at political risk analysis firm D&B, says: "BH isn't really one country. At the least it's two, and at the most it's four." Under the 1995 Dayton Accord, BH has three prime ministers, one for each ethnic group. The groups' suspicions of each other can make even the most basic decision laborious. For example, when it came to design marka banknotes, the government couldn't decide between three different designs. The OHR eventually had to impose one.

Hays says: "The government itself is structurally handicapped, because it's formed by party oligarchies. The PM is selected from one party, the minister of telecoms from another, the foreign ministry from another. And there is the tendency among these parties to tell them which meetings they can go to, how they can vote in the meetings and so on. So it's very difficult for the PMs to hold the country together."

For foreign investors, a big drawback of such internal divisions is the country's failure to unify its customs system. The two main regions, Republike Srpska and the Federation of BH, have their own customs regimes, which means foreign companies such as British American Tobacco have to set up different legal entities in each region.

McGuire of D&B says: "Unifying the customs regimes is key, because with a population of only 3.85 million, further subdivision of the country's diminutive market reduces BH's attractiveness as a place to set up production. It's an issue of economies of scale." The multiple customs regimes also make it a paradise for corrupt bureaucrats. A World Bank report estimates that 18% of firms' budgets go on bribes.

But perhaps the biggest obstacle to greater FDI, through privatizations, is the level of indebtedness of many state-owned companies. BH is perilously close to a state-sector debt crisis. Gerald Knaus, president of Balkans think-tank the European Stability Initiative, says the problem has deep historical roots: "Yugoslavia under Tito had a weak central government and several large companies with no budgetary constraints. They were supported by credits from abroad, particularly the US, which supported Yugoslavia because of its autonomy from the Soviet Union. This led to a very passive, debt-ridden public sector. But then, after the end of the Cold War, the money from abroad dried up."