By Borko Mihajlović*

Bosnia and Herzegovina (BIH) has been classified as the most fragile state in the European continent, according to the well-known United States think tank Fund for Peace and its annual Fragile States Index.[i] The primary reasons for that include the institutional inefficiency of BIH and its slow economic development. Although the Bosnian economy relates to that “risk of complete failure”, it is also the way out from this inglorious position.

So what do the federal and entity governments of BIH do to boost the economy? They follow the same steps of countries with similar levels of development in the Western Balkans. Among other things, they seek to attract foreign direct investments (FDI). But in doing so they seem not to care much about the long-term interests of the country and its citizens. It has been acknowledged in the economic policy literature that one form of economic populism refers to making decisions that have a good immediate effect, and therefore are usually applauded by the citizens (i.e. voters), while the harmful consequences are visible only in the long term.[ii]

This economic policy perspective may fit the concept of populist policy making developed by the DEMOS project. In particular, its references to the majoritarian approach.[iii] Namely, it is well known that populist leaders are particularly responsive to the majoritarian preferences of their electorate.[iv] But those preferences in economic policy often clash with long-term and sustainable economic goals. The country’s investments in thermal power plants in the past years is a key example of a fragile policy labelled as FDI. In this post, I will examine the implications of that policy through the lenses of the populist policy making model developed by the DEMOS project.[v]

An overview of the current situation

The legal framework concerning the status, protection, and incentives for FDI in BIH has been dispersed in several statutes and policy documents brought at the federal and entity levels. The most important ones refer to the Law on Policy of Foreign Direct Investment at the federal level and strategies, plans, policy documents, as well as the laws on foreign investments of the Republic of Srpska and the Federation of Bosnia and Herzegovina. There are few specifics within the content of these legal instruments comparing to classic means of protection of foreign investments which are known in comparative law. To name some of them: the principle of national treatment, protecting the investors from expropriation, guarantees to transfer its profits abroad in any available currency.[vi] BIH’s policy of attracting FDI does not entail conferring large amounts of subventions to potential investors, contrary to some of its neighbours (e.g., Serbia). The statistical data on the level of FDI in BIH show an expected decline in investments in 2020, while the major investors still come from the EU Member States and countries in the region.[vii]

There is not doubt that the political leaders in Bosnia and Herzegovina (including both the Republic of Srpska and the Federation of Bosnia and Herzegovina) have traits of populism. Bosnian politicians have constantly divided citizens along ethnic and social lines. It is commonplace for the politicians belonging to one of the three ethnicities in BIH (Bosniaks, Croatians, or Serbs) to speak about the suppression of its own ethnicity by the other two ethnic communities, or about the existence of alleged disproportion in powers between different ethnicities.[viii] The statements that “lament the destiny” of one of the three ethnicities are usually followed by threats of blockage of federal institutions or even secession from the country. Besides these Bosnian-specific ethnic divides, the classic divide between elites and ordinary people is also a part of the Bosnian political discourse (including those of governing and opposition parties).[ix]

For the field of FDI, Bosnian politicians display populist traits in two basic ways: 1) by preferring the short-term and visible results that are easy to be exploited in the election campaigns (decrease of the unemployment rate, instant growth of export rates, etc.) at the expense of the long-term well-being of the citizens (sustainable growth, environmental protection, etc.); and 2) through a myriad of more or less manipulative statements aiming to display success in attracting foreign investors, appealing to statements that are not always factually correct — something that could be considered being at the frontier between populism and mere demagogy. Both types of populist traits are identifiable in the story of investments in building and reconstructing thermal power plants in the country.

The case of power plants

Thermal power plants in BIH were built in the 1960s and 1970s in the era of communism in the former Yugoslavia. For many years now, most of those have been due for reconstruction or replacement by more sustainable power plants. Yet, the lack of funding and ideas of how to develop the energy sector in BIH has led the governments to adopt instead easy and populist solutions.

At first glance, those solutions bring several benefits, such as saving the employment of thousands of workers in the energy sector, keeping the sector independent, or making it even possible to export energy abroad. In that regard, the governments of the Federation of Bosnia and Herzegovina and the Republic of Srpska have already signed Engineering, Procurement and Construction (EPC) contracts for three coal projects (Stanari, Tuzla 7 and Banović) with chinese state-owned enterprises. Memoranda have been signed for two more projects — Gacko II and Kamengrad. The benefits stemming from these contracts seem alluring. So what is the problem with this approach, and why is it populist?

There are several problems (economic, legal, and environmental) related to the contracts signed with the Chinese companies. From the economic point of view, some projects are financed by expensive credit agreements, which will be paid by Bosnian citizens in the next decades.[x] This type of financing also means that some of those projects are not FDIs but loans.

Let us look more closely at the example of the Stanari thermal power plant, set to be reconstructed, in the Republika Srpska. Here, the local government gave the company itself as collateral to the Chinese loan provider, as well as subsidies for exploiting coal and water. To enable that, the government changed laws and regulations. As one author has noticed, “all of these ‘investments’ would not have been possible without direct interventions by the ruling elites and bypassing or changing the legal provisions”.[xi]

To sell the idea, the government built manipulative and incorrect statements (presenting a loan as an FDI) regarding the alleged successes in attracting FDI. That narrative has been omnipresent in public discourse.

Another problem with that is that Bosnian citizens are to pay expensive credits for projects that will have significant legal and environmental impacts. Coal is due to become the fuel of the past in Europe. The European Union aims to reach net-zero greenhouse emissions by 2050. And the consequences of using coal have already had an impact on the health of citizens living in areas surrounding the thermal power plants.[xii] Despite all that, BIH entities have entered agreements that will lock up the country with using coal for the next several decades. Some commitments assumed by BIH in its agreements with Chinese companies thus present an obvious breach of European legislation. The environmental concerns are also apparent.

To put the story into a broader context, this type of agreement is not unique nor novel. Serbia has followed a similar path in the development of its energy sector, while certain EU Member States, offered with this opportunity and after long deliberation, aborted coal projects with Chinese companies. An example is Greece. For years, it insisted on constructing the Ptolemaida V plant. But, in September 2019, when the plant was already at a very advanced stage, Greece’s Prime Minister announced that the government would stop producing electricity from coal by 2028, leaving the future of the plant uncertain.[xiii] A similar pattern was followed by Hungary. 

So why did the Bosnian governments decide to proceed with these projects? With all the evidence pointing to the negative consequences of such policies, the only most logical reason left seems to be their desire to keep power plants operating and their employees working. Will these projects yield long-term benefits? Probably not, but the economic short-termism that looks good to most voters and the abolition of the relevant policy expertise in laying out a strategy for power plants only show the populist logic behind the Bosnian leaders’ economic policy. Today’s easy economic choices may place a crushing burden upon society in the future.
 

*Borko Mihajlović is an Assistant Professor at the University of Business Engineering and Management and at the University of Kragujevac (from where he obtained his Ph.D. in business law). His research mainly examines different issues in the field of company law, insolvency law, and consumer law. His work has been published in leading law journals in the Western Balkans. He conducted a traineeship in the Legal Service of the European Commission. He has been engaged in different research projects in Bosnia and Herzegovina and Serbia.
 

Endnotes