Twenty years after the end of the war,Bosnia and Herzegovina (BiH) has yet to achieve sharedprosperity for its citizens and approach European livingstandards. The country has been at peace since the end of1995, but its development model needs adjustment if it is tojoin the ranks of prosperous European economies. BiH has adisproportionately large public sector that dates back toYugoslav times and has only been partly reformed since, andthe constitutional arrangements under the Dayton andWashington Agreements had as their aim the cessation of warrather than the explicit goal of building a viable andefficient state. Financial inflows, particularly aid andremittances, have been fueling consumption-based economicgrowth. These inflows were important in post-war recovery,and propelled the country back to middle-income status.However, reaching high levels of income, creating prosperityand eliminating poverty will only happen if BiH shiftstoward an economic model that builds on internationalintegration, especially with the EU, BiH’s most importanttrading partner and anchor of institutional reform. BiHneeds to rebalance its development model in two fundamentalways in order to succeed. First, it needs to unleash thepotential of the private sector while reducing the footprintof the very large public sector. Second, the economy needsto shift from an inward focus driven by local consumptionand imports to the potential of international integrationthrough investments and exports. To achieve this countryneeds more (and larger) companies, vibrant small and mediumsized enterprises and a business environment that allowsthem to grow and expand output, employment, and exports.
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