This Selected Issues paper for Bosnia and Herzegovina (BiH) reports that GDP per capita in BiH is similar to that in neighboring Balkan countries. BiH risks are falling behind rather than catching up with other transition economies in terms of its economic development. This could delay the process of convergence to and integration with the European Union, including its ambitions to eventually adopt the euro. Accelerated structural reforms and macroeconomic stability remain key to achieving higher and sustained growth rates.

Abstract

This Selected Issues paper for Bosnia and Herzegovina (BiH) reports that GDP per capita in BiH is similar to that in neighboring Balkan countries. BiH risks are falling behind rather than catching up with other transition economies in terms of its economic development. This could delay the process of convergence to and integration with the European Union, including its ambitions to eventually adopt the euro. Accelerated structural reforms and macroeconomic stability remain key to achieving higher and sustained growth rates.

I. Bosnia and Herzegovina: Catching up or Falling Behind Other Transition Economies?1

Core Questions and Findings

  • How does Bosnia and Herzegovina’s (BiH) level of national income compare with other economies at a similar stage of development? BiH enjoys a reasonably high level of national income. GDP per capita (adjusted for cross-country differences in purchasing power) is broadly similar to that of its immediate neighbors. And once remittance inflows are included, Bosnia and Herzegovina appears to have a level of per capita income well above the average for the Balkan region. Moreover, after an allowance is made for Bosnia and Herzegovina’s relatively late start to transition and the detrimental effects of the 1992-95 war, its income level appears to be in line with that of other transition economies at a similar phase of development.

  • How does BiH’s growth dynamics compare? Using conventional convergence analysis, Bosnia and Herzegovina’s rate of economic growth appears to fall short of that achieved by other countries at a similar phase of development, although data uncertainties cloud the analysis.

  • What are the implications of the growth gap for the future? BiH risks falling behind, rather than catching-up with, other transition economies—and the rest of Europe—in terms of its economic development. This could delay the process of convergence to and integration with the European Union, including its ambitions to eventually adopt the euro.

  • How to boost the growth prospects? Accelerated structural reforms and macroeconomic stability remain key to achieving higher and sustained growth rates. Enterprise restructuring and privatization, alongside improving the business environment and reducing labor taxes, are critical to unlocking the potential for increased private investment and job growth. And meaningful structural fiscal reforms are needed to maintain BiH’s hard won macroeconomic stability—an important prerequisite to achieving high and sustained growth rates.

A. Introduction

1. Bosnia and Herzegovina (BiH) has come a long way since it embarked upon transition in 1995. It has maintained respectable annual GDP growth rates of 5-6 percent since 2004, and experienced rapid export growth and strong inflows of foreign investment, underpinned by the currency board and significant donor assistance. Considering that this economic record has been achieved in the context of a difficult post-war setting, it appears all the more impressive.

2. When examining an economy’s performance it is useful to draw comparisons with other similar economies. This is especially so for a European emerging economy such as BiH that is aiming to catch-up, or converge, with its peers and is aspiring to join the EU and to adopt the Euro. With this in mind, this paper explores BiH’s economic record in a cross-country setting and asks whether the country is on or off the convergence path followed by other emerging European economies at a similar phase of transition.

B. A Reasonable Level of National Income

3. BiH appears to enjoy a reasonable level of per capita income. Despite its late start to transition and the devastating effects of the 1992-1995 war, GDP per capita in BiH is broadly similar to that in neighboring Balkan countries. Moreover, this is only a partial measure of BiH’s income as it excludes the sizeable remittances inflows to the country. Once such inflows are included in the measure, BiH’s Gross National Income (GNI) per capita appears to be well above the Balkan average (US$11,500 versus US$10,300). Nevertheless, (BiH) continues to lag well behind the rest of emerging Europe.

uA01fg001

2007 GDP PPP per capita

(US dollars, thousands)

Citation: IMF Staff Country Reports 2008, 326; 10.5089/9781451804966.002.A001

Sources: WEO; and IMF staff estimates.
uA01fg002

2007 GNDI PPP per capita

(US dollars, thousands)

Citation: IMF Staff Country Reports 2008, 326; 10.5089/9781451804966.002.A001

Sources: WEO; and IMF staff estimates.

C. Late Comer and the War Effect

4. Such a contemporaneous comparison of income levels across countries is perhaps unfair to BiH. This is for two reasons: (i) no allowance is made for BiH’s relatively late start to transition—most European emerging economies began their transition during 1990–92, whereas BiH did not start its transition to a market-based economy until 1995; and (ii) no allowance is made for the detrimental effect on BiH’s transition path of the 1992–1995 war—something that other emerging countries did not experience. One way to control for both this “latecomer” and “war effect” is to compare BiH’s 2007 income level with the one of other transition economies in 1999. Using a lag of eight years recognizes that BiH embarked upon its transition path five years later than most other emerging economies,2 and allows an additional three years to compensate for the fact that BiH experienced a war just before the start of its transition. Under this approach, GNI per capita in BiH appears to be broadly in line with that of other transition economies at a similar phase of transition.

uA01fg003

GNP PPP per capita

(US dollars, thousands)

Citation: IMF Staff Country Reports 2008, 326; 10.5089/9781451804966.002.A001

Sources: WEO; and IMF staff estimates.

D. Catching-up or Falling Behind?

5. Despite maintaining a reasonably good level of per capita income, BiH’s growth dynamics appear to be somewhat less impressive. Controlling for differences in the level of income across countries, BiH’s rate of growth appears to fall short of that achieved by other countries at a similar phase of transition.3 The implications are stark: despite its relatively high level of income, BiH risks falling behind, rather than catching-up with, other transition economies—and the rest of Europe—in terms of its economic development. This could, amongst other things, delay the process of convergence to and integration with the European Union countries, including BiH’s ambitions to eventually adopt the euro.

uA01fg004

Growth Performance, 2000-07

Citation: IMF Staff Country Reports 2008, 326; 10.5089/9781451804966.002.A001

Sources: WEO; and IMF staff

6. But data uncertainties cloud the picture. A possible explanation for BiH’s apparent growth deficit may lie in the mismeasurement of the country’s GDP: official measures of GDP do not fully capture activity in BiH’s burgeoning grey economy. It would take an upward adjustment of some 30 percent to GDP to bring BiH in line with the typical convergence path followed by other transition economies. This is not an unreasonable adjustment as it falls well within the range of the numerous estimates of BiH’s grey economy activity.4 5 However, an adjustment should also be made to the GDP of other transition economies to the extent that they too have economic activity that falls outside of the official measure of GDP. Such adjustments would move the convergence path outward and to the right, reopening the growth gap with BiH. Other possible explanations for the growth deficit might include the fact that BiH has not yet had access to large amounts of EU funding. But against this one must balance the unparalleled donor aid inflows that have benefited BiH.

E. Conclusions

7. BiH enjoys a good level of per capita income, but it appears to be experiencing a growth deficit. BiH’s rate of economic growth is unimpressive in comparison with the rates attained by other emerging economies at a similar phase of transition. A persistent growth deficit could, among other things, complicate BiH’s ambitions to converge to and get better integrated with the European Union countries, eventually achieving higher living standards. In addition, BiH’s current levels of income depend heavily on large remittance inflows, underscoring the vulnerability of the economy to a slowdown in these flows. Closing the growth deficit and catching up with other transition economies and the European Union will involve making strong progress on structural reforms (e.g., enterprise restructuring, privatization, and reforms in the fiscal area) and maintaining macroeconomic stability, thus creating an environment conducive to private sector investment, job creation, and growth.

II. Accelerating Inflation—Reason for Concern?6

Questions and Findings

  • What is driving inflation in Bosnia and Herzegovina? Global energy and food price shocks contributed disproportionately to the pickup in inflation in Bosnia and Herzegovina (BiH): about three quarters of the 8.2 percent rise in the CPI in 12 months to May 2008 can be attributed to energy and food prices; and only one quarter of that increase to other factors.

  • How far is BiH’s price level from the one of the EU? Annual data suggests that convergence toward the EU average price level may explain some of the price increases, particularly for food. In 2006, BiH’s individual consumption price level (relative to the EU level) rose 1.6 percentage points (3.7 percentage points for food).

  • Are there underlying inflation pressures? A rise in core inflation (excluding food and energy)—from near zero a year ago to 3.2 percent in May 2008 is of concern to policymakers. It signals that domestic demand may be growing too fast (in excess of the economy’s potential) creating a risk that the relative price adjustments driven by energy and food price shocks could lead to permanently higher inflation. Other signs of intensifying domestic demand pressures include an acceleration in wage growth and a widening trade deficit. An alternative measure of core inflation (trimmed mean CPI), also suggests that underlying inflation may be running even higher—around 5 percent.

  • What are the key policy implications? The task of restraining domestic demand under the currency board falls mainly to fiscal policy and wage policy in the public sector. Fund policy advice is for the general government to avoid loosening the fiscal stance and to adopt a disciplined public wage policy—one that sends a signal of restraint to the private sector and which seeks to avoid wage competition among levels of government. Attempts to suppress inflation by cutting VAT rates for selected products would be neither effective nor desirable: the extent to which such cuts would be passed on to the final prices is uncertain; and rising prices for food and energy signal these products’ relative scarcity, providing incentives for their increased production and more efficient use.

A. Introduction

8. Inflation has recently been on the rise. It accelerated sharply in the second half of 2007, rising from near zero in June to 4.9 percent in December. By May 2008 it reached 8.2 percent. This acceleration comes after a prolonged period of subdued inflation, and pushes consumer price developments to the forefront as a public policy concern. With food prices registering double-digit increases by end-2007, consumer awareness of the problem has been immediate.

uA01fg005

Inflation

percent

Citation: IMF Staff Country Reports 2008, 326; 10.5089/9781451804966.002.A001

Sources: National authorities; and IMF staff estimates.

9. What are the causes of the accelerating inflation and how can policies help contain it? This paper examines BiH’s recent experience in the context of external and domestic developments in an attempt to distinguish between those factors originating in the global environment, and those related to changes in domestic conditions in order to examine the causes of recent inflation developments.

B. Background

10. Until recently, BiH had witnessed an impressive inflation performance. Recent acceleration notwithstanding, BiH’s inflation performance of the last few years compares favorably with that of Central and East European (CEE) countries (Figure 1).7 In fact, between Q3 2006 and Q4 2007, BIH’s inflation was below the euro area inflation. Notably BiH’s superior inflation performance is striking when compared to that of CEE peggers, such as Bulgaria and the Baltics (bottom panel).

11. As a general proposition, accelerating inflation in BiH could be attributed alternatively to purely domestic, or external factors. The prolonged period of BiH’s low inflation coincided with years of healthy growth, strong domestic demand and double-digit wage increases. This raises the possibility that domestic demand pressures are beginning to be finally reflected in consumer prices. The fact that inflation has also recently been accelerating in other CEE countries could be purely coincidental, attributable to rising domestic demand pressures in these countries as well. Indeed, peggers in particular share other signs of a domestic demand boom: rapid credit growth and widening current account deficits. Alternatively, there may be factors originating in the global economy that affect all countries and that explain why inflation performance has worsened across the board.

BiH’s Consumer Price Index

The development of the CPI was initiated with international assistance (ISTAT) in 2004. The data are now available on a monthly basis, for the period starting January 2005. Until then, there was no countrywide index of consumer prices. The entities’ statistical offices had been producing the retail price index (RPI) and the cost-of-living index (COLI), both of which were established in the late 1980s. The indices are based on the methodology inherited from the former Yugoslavia, which predates the current international standards. One of their major drawbacks is that their weights are derived from household expenditure surveys in 1986 and 1987, respectively. In contrast, the CPI conforms to the methodological standards recommended by the EU. Its weights have been derived from the 2004 Household Budget Survey, which had a full geographical and household coverage.

C. Decomposing the CPI

12. One channel of possible spillovers from the global economy is via import prices of energy (crude oil, refined petroleum products and natural gas) and food. These commodities are internationally traded and their prices are determined as a function of global demand and supply conditions. Thus one would expect that domestic supply and demand conditions in a small country like BiH will have little bearing on energy and agricultural price developments.

13. International energy and food prices surged over the past 12 months amid strong demand growth from emerging markets and the biofuels industry, and a tightening supply. For countries like BiH, which links its currency to the euro, the impact of the commodity price surge has been partly mitigated by the euro strength against the dollar. For example, the international food price index increased by 44 percent in dollar terms since May 2007, but only by 25 percent in euro terms. Measured at the final consumer level (by change in the CPI), the increase was about only half of that (bottom part of the table).8

International Commodity Prices, Change to May 2008

(Percent)

article image
Sources: IMF Commodity Database; and IMF staff calculations.

CPI, change to may 2008

(percent)

article image
Sources: National authorities; and IMF staff estimates.
Figure 1.
Figure 1.

Bosnia & Herzegovina and CEE Peers: Inflation, 2003–08

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2008, 326; 10.5089/9781451804966.002.A001

Sources: National authorities; Eurostat; and IMF staff calculations.Note: BiH’s inflation figures exclude the one-off effect of VAT introduction in January 2006.

14. Both the food and energy components of the consumer expenditure basket have had a disproportionately large impact on changes in BiH’s CPI—in excess of their respective weights in the basket (34 percent for food; and 11 percent for energy). In May 2008, food accounted for 55 percent of the 12-month increase in the CPI; energy for 20 percent; and the rest for 25 percent.

uA01fg006

Contribution to Overall Inflation

(CPI, net of VAT effect)

Citation: IMF Staff Country Reports 2008, 326; 10.5089/9781451804966.002.A001

Sources: National authorities; and IMF staff estimates.

15. At 34 percent of the total consumption basket, the weight of food in BiH is relatively low compared to other countries with a similar average per capita income. In Albania, Bulgaria, Macedonia, and Romania, the weight of food in the CPI ranges between 40 and 50 percent. Thus, compared to these countries, we would expect BiH’s general inflation rate to be less affected by the recent surge in international food prices. This helps explain in part why BiH’s overall inflation performance compares favorably with that of its peers. For the same reason, we would expect BiH to be outperformed by the euro area, where food accounts for only about 20 percent of the total consumer basket.

uA01fg007

Food consumption and income level

Citation: IMF Staff Country Reports 2008, 326; 10.5089/9781451804966.002.A001

Sources: National authorities; and IMF staff estimates.

16. BiH’s food price increases may also reflect, in part, the general convergence of wages and prices in emerging European countries toward average EU levels. This trend is supported by increased growing trade in food products. Indeed, that appears to be part of the story. There is considerable room for BiH’s general price level to rise toward the euro area level, although the room for a number of food categories appears limited. According to Eurostat, BiH’s average personal consumption price level was about 45 percent of the EU average price level in 2006.

uA01fg008

Bosnia & Herzegovina: Price Levels, as Percent of EU, 2006

Citation: IMF Staff Country Reports 2008, 326; 10.5089/9781451804966.002.A001

Sources: Eurostat; and IMF staff estimates.

17. In contrast, food items like non-alcoholic and alcoholic beverages, oils and fats, milk, cheese and eggs, are in the 74–87 percent range of the corresponding average EU level. Still, the latest data (2006) show that price convergence toward the average EU level was relatively faster for the food categories: while the relative price level of overall individual consumption (as percent of the EU level) rose by 1.6 percentage points, the increase for the food categories (calculated as a simple average) was 3.7 percentage points.

uA01fg009

Price Levels, as Percent of Euro Area, Change 2005–06

Citation: IMF Staff Country Reports 2008, 326; 10.5089/9781451804966.002.A001

Sources: Eurostat; and IMF staff estimates.

D. Core Inflation

18. Core inflation has trended upward, but remains low for now. While food and energy price increases explain a large part of the recent pickup in BiH’s inflation, it is clear that core inflation (with food and energy excluded) rose as well, moving up from a zero percent range to 3.2 percent in May 2008—still fairly low, marginally above the euro area figure of 2.4 percent. This seems to suggest that purely domestic price and cost pressures, which are likely to play a more prominent role in explaining core inflation, have been successfully contained thus far.

uA01fg010

CPI and Its Components

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2008, 326; 10.5089/9781451804966.002.A001

Sources: National authorities; and IMF staff estimates.

19. Looking ahead, however, there is risk that inflationary pressures may intensify. This will occur, if spillovers and second-round effects from the food and energy inflation materialize. In particular, wage growth—already rapid in both entities, but so far broadly in line with productivity gains—has been accelerating. That reflects the cumulative effect of years of fast aggregate demand growth and the diminishing slack in labor markets (Box 2).9 In a situation where labor markets continue to be tight, the danger of the temporary inflation from food and energy price increases feeding into wage growth is correspondingly higher. Resisting the wage escalation will be difficult but necessary, if BiH is to avoid setbacks to its external competitiveness.

uA01fg011

Wages and Inflation

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2008, 326; 10.5089/9781451804966.002.A001

Sources: National authorities; and IMF staff estimates.

20. Wage pressures in the economy may be further compounded by the recent upward wage adjustments in the public sector. The public wage reforms by the state and the RS governments led to sharp upward adjustments in the public wages. Given the still-large role of the public sector in BiH’s economy, these increases may have repercussions for private sector wage settlements. Wage indexation mechanisms that tie public sector wages to changes in the economy-wide wage developments may accelerate wage escalation through a feedback loop.

Estimating BiH’s Potential Output

Estimates of potential (or full-capacity) output can be useful for gauging the degree of utilization of the economy’s resources and growth prospects. Such estimates, while never guaranteed to be accurate, are fairly reliable in stable economies. For a transition country like BiH, which has been on a long-term recovery trend from a period of conflict, some caution is required in interpreting the results. We have estimated BiH’s potential output and its future growth prospects, using two techniques: (a) the Hodrick-Prescott (HP) filter for the historical series; and (b) the production function approach using employment and investment data.

uA01fg012
Sources: National authorities; and IMF staff calculations and projections.

The estimates suggest that the slack that existed in the economy several years ago, has gradually been worked off. Looking ahead, GDP growth of between 4 and 6 percent will keep the economy operating close to full capacity and the labor markets are likely to remain tight.

21. One way to gauge underlying inflationary pressures can be done with the help of the trimmed-mean CPI (Box 3). Separating persistent inflation trends from purely transitory effects is important not only for analysis of economic trends, but could also as a way of providing a better guide to wage policy decisions than headline inflation. Estimating core inflation by excluding food and energy from the CPI basket to arrive at a core inflation measure is not ideal in a country like BiH, for two reasons: one, it would leave us with an inflation measure that would bear little resemblance to prices faced by an average household (because of the relatively large weight of the two excluded categories); and, two, not all food and energy items may exhibit high volatility, so there would be little need in excluding all of them.

Estimating Core Inflation: the Trimmed Mean CPI

Tying wage increases to headline inflation carries a risk for overall macroeconomic stability in times when shocks to the consumer price level come from a limited number of volatile items. That is because the wage adjustment may feed off of price increases that are purely transitory. And, in that way, the wage adjustment can cause the underlying inflation rate to ratchet up over time via a wage-price feedback.

Linking wages to a measure of underlying inflation would be expected to produce a more stable outcome. One way to estimate underlying inflation would be by excluding energy and food price changes. Yet, ignoring food and energy prices completely would not be ideal, for two reasons: one, food and energy account almost for half of the consumer expenditure basket in BiH—excluding energy and food out would leave us with an inflation measure that would bear little resemblance to prices faced by an average household; and, two, not all food and energy items may exhibit high volatility, so there would be little need in excluding all of them.

The challenge in arriving at underlying inflation is to determine what part of monthly inflation is lasting as opposed to fleeting. We can define core inflation as the inflation that represents the underlying trend, once transitory swings have been smoothed out. An approach that is often used to estimate the underlying inflation rate is the trimmed mean (see, for example, Dolmas (2005)). It is calculated for a given month by taking the price changes for each of the individual components of the CPI. These are sorted in descending order, and a certain fraction of the most extreme observations in both tails of the distribution are thrown out, or “trimmed”. The trimmed mean inflation rate is then calculated as a weighted average of the remaining components.

Alternative estimations of trimmed mean inflation give a fairly narrow range of values for core inflation (see figure). For the period January 2005–May 2008, the trimmed inflation shows no bias compared to the actual monthly CPI increases. At the same time, it gives a smoother profile than the headline inflation. It is also clear that the measure of core inflation that excludes food and energy deviates significantly from the inflation faced by a typical household over this period.

uA01fg013

Alternative Measures of Inflation

(Percent)

Citation: IMF Staff Country Reports 2008, 326; 10.5089/9781451804966.002.A001

Sources: National authorities; and IMF staff calculations.

E. Conclusions

22. Fast-rising inflation is a new phenomenon in BiH. For many years now, the country has done well in terms of its inflation performance relative to other Europe’s emerging economies. However, the recent global food and energy price shocks have quickly pushed up the overall price level, and pose the risk of becoming entrenched if they trigger sharp upward wage adjustments. This danger is underscored by the signs that BiH’s growth has been running close to its potential and that domestic demand pressures have intensified.

23. Fiscal and public sector wage policy plays a primary role in controlling inflation in BiH. Given the currency board arrangement, fiscal restraint remains the key policy tool for managing the risks of overheating. Another channel through which government can exert some influence over wage developments in the economy is public wage policy. While the recent public wage reforms by the State and the RS governments may result in a one-time step increase as a result of the public wage realignment, it is critical that the system for adjusting wages in the future exerts moderating influence on wage settlements in the rest of the economy. Coordination in public wage policy would be useful to head off wage competition among levels of government that could otherwise lead to wage escalation.

24. Differentiated VAT rates for food and energy are not helpful as a policy response to higher prices of food and energy. Governments often come under political pressure to attenuate the adverse income impact of rising food and energy prices on households. However, attempts to suppress inflation by cutting VAT rates for selected products are neither effective nor desirable: the extent to which such cuts would be passed on to the final prices is uncertain; and rising prices for food and energy signal these products’ relative scarcity, providing incentives for their increased production and more efficient use. Furthermore, differentiated VAT rates complicate tax administration, raising the cost to the taxpayer and the government.

References

  • Cuc, M., 2007, “Unemployment and Labor Market,” in Bosnia and Herzegovina—Selected Issues, IMF Country Report No. 07/ 269 (Washington: International Monetary Fund).

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  • Dolmas, J., 2005, “Trimmed Mean PCE Inflation,” Working Paper 0506, Research Department, Federal Reserve Bank of Dallas.

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  • Silver, M., 2006, “Core Inflation Measures and Statistical Issues in Choosing Among Them,” IMF Working Paper 06/ 97 (Washington: International Monetary Fund).

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1

Prepared by Graham Slack and Irena Jankulov.

2

The lag is proportionately shorter for those economies that embarked upon transition after 1990.

3

The same approach as described earlier was used to control for Bosnia and Herzegovina’s latecomer status and the war effect. Specifically, BiH’s economic performance between 2000-07 is compared with other countries’ economic performance eight years earlier (depending on when they embarked upon transition).

4

See Chapter V, IMF Country Report No. 05/198

5

This approach assumes that inclusion of the grey economy does not significantly affect the measured rate of growth of the economy. The fact that narrow money growth and velocity of circulation have remained broadly stable with respect to BiH’s measured GDP suggests that the grey economy has not grown at a significantly different pace to the official economy.

6

Prepared by Milan Cuc.

7

The focus here is on the period starting January 2005, when the new CPI, conforming to the international standards, began to be compiled (see Box 1).

8

This is because not all food items in the consumer basket are subject to international trade. Furthermore, commodity imports typically undergo further processing/transportation, etc, before reaching the final consumer. To the extent that the associated additional costs do not change as much as the commodity import prices, the impact of import cost increases on final consumer prices is correspondingly muted.

9

According to the 2007 Labor Force Survey (LFS), BiH’s unemployment rate is 29 percent. However, much of this is structural unemployment (see IMF Country Report 07/269, Chapter 3), which is unlikely to be affected by changes in demand growth.

Appendix I—Constant Market Share Analysis (CMSA)

CMSA decomposes change in exports(x1-x0)

X1-X0=rX0+Σi(ri-r)Xi0+Σij(rij-r)Xij0+Σij(ρij-ri)Xij0

Export growth = global market growth + commodity composition effect + market distribution effect + competitiveness

where

Xt ij = value of Bosnian exports of commodity i to country j during period t

r = growth rate of world exports

ri = growth rate of world exports of commodity i

rij = growth rate of world exports of commodity i to country j

ρ ij = growth rate of BiH exports of commodity i to country j

The global market growth effect (the first term) measures how much BiH exports grew to keep the export share in world trade unchanged. In other words, this term shows how much BiH exports would increase if the growth rate over the years is equal to the growth of world trade.

The commodity composition effect (the second term) calculates how much export growth has benefited from the concentration of exports on commodities that demand has been rising rapidly relative to overall world exports.

The market distribution effect (the third term) measures how much export growth has benefited from increased demand in particular export markets.

The last term, the competitiveness effect, is a residual. This captures the change in export market share after adjusting for the impact of other effects.

Appendix Table 1.

Classification of Export Categories by Factor Intensity and Labor Skills

article image
Sources: Peneder (1999) and Landesmann and Stehrer (2003).

References

  • Abiad, A., D. Leigh and A. Mody, 2007, “International Finance and Income Convergence: Europe is Different,” IMF Working Paper 07/ 64 (Washington: International Monetary Fund).

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  • Coudert V. and C. Couharde, 2005, “Real Equilibrium Exchange Rate in China,” CEPII Working Paper 05-01.

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  • Fabrizio, S., D. Igan and A. Mody, 2007, “The Dynamics of Product Quality and International Competitiveness,” IMF Working Paper 07/97 (Washington: International Monetary Fund).

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  • International Monetary Fund, 2006, “Methodology for CGER Exchange Rate Assessments,” http://www.imf.org/external/np/pp/eng/2006/110806.pdf

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  • Jahjah, S., 2007, “External Balance Sheet and the Current Account Adjustment Required to Stabilize Net Foreign Liabilities,” in Bosnia and Herzegovina—Selected Issues, IMF Country Report No. 07/ 269 (Washington: International Monetary Fund).

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  • Jahjah, S., 2006, “Alternative Current Account Estimates,” in Bosnia and Herzegovina—Selected Issues, IMF Country Report No. 06/ 368 (Washington: International Monetary Fund).

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  • Landesmann, M. and R. Stehrer, 2003, “Structural Patterns of East-West European Integration: Strong and Weak Gerschenkron Effects”, in wiiw Structural Report 2003 on Central and Eastern Europe, Volume 1, The Vienna Institute for International Economic Studies.

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  • Peneder, M., 1999, “Intangible Investment and Human Resources,” Journal of Evolutionary Economics, Vol. 12, No. 1-2, pp. 107 -34.

10

Prepared by Mali Chivakul.

11

BiH’s business cycle is computed using an HP filter (lambda = 1600) on annual GDP data from 1998 to 2007.

12

See Lee and others (2008) and IMF (2006) for more details on the empirical estimations and variable construction.

13

Jahjah (2006) estimated that remittances could be higher by 4.5-10 percentage points of GDP (at the time, the CBBH’s official estimate for private transfers is about 14 percent of GDP.

14

See IMF (2006) and Lee and others (2008) for a detailed explanation of the variables and the variable definitions.

15

CEE countries in the estimated sample are Czech Republic, Hungary, Poland, Slovakia, and Slovenia.

16

Due to BiH’s limited data on productivity (only going back to 2003), we are not able to estimate the RER before 2004.

17

Defined by gross value-added per employee. Data for Bosnia & Herzegovina are from the Statistics Agency. Data for the Euro Area, Croatia and Slovenia are from Eurostat. Croatia’s data are only up to 2004.

18

The VAT impact on exports in 2006 which is about 14 percent is taken out from the growth calculation.

19

Based on the classification by Landesmann and Stehrer (2003). Low-tech and labor intensive products include food, textiles, animal and vegetable oils, clothes, footwear, and leather products. Resource-intensive products include wood products, chemicals, metals and nonmetallic mineral products. Medium- to high-tech products include machinery and transport equipment and electrical and optical equipment. For more details, see Appendix Table 1.

20

Based on the classification by Peneder (1999). See Appendix Table 1 for more details.

21

There are 9 commodity groups based on product disaggregation at the SITC 1-digit level and market disaggregation into 11 regions based on the importance as Bosnia & Herzegovina’s export destination (Croatia, Serbia, Slovenia, Germany, Italy, Austria, Hungary, USA, other advanced European countries, other emerging European countries, the rest of the world).

Bosnia and Herzegovina: Selected Issues
Author: International Monetary Fund