Hungary and Bosnia and herzegovina: a success and a failure of transition

This paper sets out to compare some aspects of the transition packages in two seemingly incomparable countries, in search of similarities and dissimilarities, and hints as to where Bosnia and Herzegovina may have gone wrong. Particular attention is paid to the macroeconomics part of the transition package, together with assessment of privatization and the role of FDI. The institutional aspect of the transition, particularly in Bosnia and Herzegovina, is treated in thesecond part.

Hungary, seen here as a success story of transition, joined the EU on May 1, 2004. However, any similarity that Hungary’s transition policy and measures appears to have to the Washington Consensus will not bear more than cursory scrutiny. Privatization was conducted under wise government policy. Foreign-trade policy and foreign-trade liberalization formed a gradual, well-executed process. Hungary used exchange-rate policy to support the competitiveness of domestic and transnational corporations on the world market. Wage and income policy were supportive to economic growth and
driven by productivity considerations. Monetary policy was also designed to back economic growth and inflation was successfully brought under control. The necessary political consensus was present in Hungary and due attention was given to institution and capacity building. Thus Hungary’s transition policy seems to have been more Keynesian than free-market driven.

The transition package in Bosnia and Herzegovina is entirely free-market driven. The state has been excluded from the economy on ideological
grounds, though a ‘normally’ organized state still has not arisen. Under such conditions, a full protectorate might have been more efficient. For Bosnia and Herzegovina is a semi-protectorate. The country is devoid of macroeconomic management except for the currency board. Voucher privatization has been
performed along entity lines, according to ethnic considerations. The loss of large foreign markets was of great importance both to Hungary and to Bosnia and Herzegovina. Hungary lost the COMECON market, while Bosnia and Herzegovina lost that of former Yugoslavia. Still worse, Bosnia and Herzegovina lost its part in the division of labour within the Yugoslav market. Then came the 1992–5 war. Bosnia and Herzegovina’s starting position for transition was incomparably more difficult and complicated than Hungary’s. It called for a more cautious solution than the one offered by the international community, and a more supply side-oriented economic concept than Hungary’s. Despite all that, Bosnia and Herzegovina has been practising the Washington Consensus in the fullest sense, which Hungary did not.