CB BiH: What We Import, and Could Produce Ourselves

The Office of the Chief Economist of the Central Bank of Bosnia and Herzegovina has conducted an analysis of BiH's trade exchange in 2014 and export opportunities, noting that we are recording a constant deficit, reports the Bosnian news agency Patria.

Our trade exchange is characterized by a high dependence on imports of energy (oil, oil derivatives and gas), food, medicines, machinery and apparatus, vehicles and textiles. On the other hand, we mostly export semi-finished products: base metals, wood and wood products, electricity, footwear, machinery and apparatus and their parts, and furniture.

TRADE DEFICIT

The trade deficit in the years before the financial and economic crisis (2008) reached a high level of 42.7% of GDP. In the post-crisis years, due to globally low demand, the volume of trade decreased, which led to a reduction in the trade deficit of Bosnia and Herzegovina, which in the previous year accounted for 29.7% of GDP. Export coverage of imports has oscillated around 50% in all previous years.

In the current year, for the first nine months, the trade deficit amounts to 5.7 billion BAM. Of this, the largest trade deficit is recorded in the exchange of products of mineral origin, which mainly refers to oil and oil derivatives, 1.39 billion BAM. In trade in agricultural products and food industry products, the deficit amounts to 1.5 billion BAM. Furthermore, a large deficit is recorded in trade in chemical industry products, 750.6 million BAM. The deficit in trade in machinery, apparatus and mechanical devices amounts to 960.0 million BAM, while in trade in transport equipment, which mainly refers to imports of passenger cars, the deficit amounts to 523.5 million BAM.

The question arises as to what development strategy is optimal for Bosnia and Herzegovina in light of the macroeconomic model determined primarily by the currency board, i.e., a fixed exchange rate, with the understanding that such a model presupposes, to a certain extent, restrictive fiscal policy, limited monetary policy, and free capital flow. Possible development strategies include import substitution with domestic production or a strategy based on export growth and capital inflow in the form of foreign direct investment as the only form of sustainable borrowing.

Growth based on import substitution mainly implies substituting imports of basic goods with domestic production, which further means that goods produced in this way are consumed domestically, and that the circulation of money remains in the country. This model of economic development was popular in the 1960s because it promoted economic independence and development in developing countries. Import substitution mainly referred to the production of energy, food and water. This model was abandoned because it proved inefficient in third world countries due to their inability to position themselves on the world market. Since then, most countries have turned to a growth model based on an export strategy.

This is particularly impossible in the new economic order based on neoliberalism, because a growth strategy based on import substitution implies protection of domestic production, i.e., protectionism, which again can only be an effective solution for large countries where economies of scale exist. In the case of a small open economy, such as BiH, and in conditions of globalization and existing trade agreements, it is not possible to develop an economy based on the protection of domestic production. Nevertheless, it is often heard that BiH should have its own agricultural products as a basis for further development of the food industry. It is true that our country possesses high-quality, unpolluted land and grasslands, as well as a certain tradition in agricultural production, but it should be mentioned that the share of agricultural production in GDP is constantly declining, and that the development of this sector requires a development strategy that also includes significant funds for subsidizing agricultural production, which is otherwise the case in developed countries, where significant budget funds are allocated for incentives in this area. Furthermore, the strategy should monitor and develop measures and standards for quality assessment, because it has been shown that in this area there is neither qualitative nor price competitiveness, i.e., examples of price or qualitative competitiveness are very rare. Therefore, agricultural production requires significant domestic financial resources and a carefully formulated strategy.

INDUSTRY DEVELOPMENT

If we consider the limitations mentioned in the case of developing our own industry for the purpose of import substitution, growth based on promoting exports nevertheless emerges as a logical development model. The only opportunity for development lies in areas where there is a raw material base, i.e., free access to resources. Based on this, the wood industry and furniture industry, as well as the metal processing industry and electricity production, have a chance to further develop towards greater product finalization by utilizing domestic resources as a base.

Electricity production has proven to be a significant export resource, which should be a development opportunity for BiH in the future due to good climatic and hydrological conditions. Also, in this area, one can talk about the possibility of greater utilization of existing energy capacities for electricity production for the domestic economy. In this way, we would ultimately obtain export products of higher processing stages, with lower production costs, which would increase the competitiveness of our products on the world market. In line with the above, this particularly applies to the further development of the wood industry to higher processing stages, and the metal processing industry, especially in the production of car parts, where BiH has a long pre-war tradition, access to raw materials, and a good image on the EU market in this production segment.

Furniture production is one of the bright examples of a good export strategy because a cluster approach was applied, which resulted in good export operations in which we achieved a surplus in trade exchange. In addition to furniture production, we achieve a trade surplus in the wood industry as a whole, as well as in the production of base metals.

To conclude, export sectors identified as having significant development potential should have secured sources of financing for additional investments and development that would enable good positioning on the world market, which can only be provided by a good business environment that forms the basis for attracting foreign direct investment as the main source of financing in the given conditions.