Civil aspects of the Dayton and Erdut Agreements


Doc. 7590

25 June 1996



Rapporteur: Mrs VERSPAGET, the Netherlands, Socialist Group

I. Background

            The Parliamentary Assembly of the Council of Europe on 25 April 1986 adopted Order No. 521 (1996) on the implementation of the Dayton Agreements for peace in Bosnia-Herzegovina, instructing its Committee on Economic Affairs and Development, its Committee on Migration, Refugees and Demography and its Committee on Agriculture and Rural Development to carry out, as early as possible, a joint fact‑finding visit to some of the war-stricken regions in Bosnia-Herzegovina and Croatia (in particular Eastern Slavonia). 

            This rapporteur was appointed by the Committee on Economic Affairs and development to cover the area of economic reconstruction.  Areas visited during the period from 4 to 9 June were, in Bosnia-Herzegovina, Sarajevo, Gorazde and Tuzla; and in Eastern Slavonia Osijek, Vukovar and Erdut.  All in all, over twenty meetings were held with international organisations; national, regional and local government representatives; and non-governmental organisations. 

            In the present opinion we shall deal, successively, with economic reconstruction in Bosnia-Herzegovina and Eastern Slavonia, to be followed by a chapter of general conclusions.  The opinion does not aspire to giving an exhaustive description of the economic problems of the regions in question, but rather to provide an overall assessment of the situation and the prospects for the future, which could serve as a basis for further action.

II. Economic reconstruction in Bosnia-Herzegovina

            While the military implementation of the Dayton Agreements for peace in Bosnia‑Herzegovina is running according to plan, the political implementation and its civilian counterpart is lagging increasingly behind.  Yet the military part was supposed not only to stop the hostilities, but also to provide a stable framework, within which a normal political life could be established and economic reconstruction begin. 

            Of particular importance are the nation-wide elections for a Bosnian and Herzegovian Parliament foreseen for 14 September 1996.  The OSCE and Mr Carl Bildt, High Representative of the Dayton Agreement Implementation Council, are doing their best to assist in ensuring that the elections can be free and fair, but they are fighting an uphill battle.

            Your rapporteur mentions this to underline the fundamental importance of a functioning democracy, a stable political framework and a countrywide governmental authority for any lasting economic reconstruction and development. Recovery in Bosnia‑Herzegovina is rendered particularly difficult by the fact that the country has to overcome not only a devastating war but also over forty years of the Tito brand of communism, which manifested itself in state ownership of most means of production coupled with a peculiar form of employee autonomy at company level.

            Put in stark but realistic terms, if no economic results of the new-found peace are forthcoming in the near future, then that peace has little chance of surviving.  Nation-wide unemployment is estimated at over 70%, and it reaches 80% in Sarajevo and 90% in certain areas such as Gorazde.  Industrial production stands at only 10% of its pre‑war level.

            Given the magnitude of the reconstruction task, the question becomes what should come first: "micro" or "macro" assistance? The uncomfortable answer is: both. 

            At "micro" level it is urgent to embark on ambitious housing reconstruction in order to shelter the people, in particular before the forthcoming winter.  Repair of existing but damaged buildings and construction of new homes are also needed to encourage refugees and displaced people to return, including those who cannot return to their region of origin. The UNHCR, recognising the strong ethnic division of the country at this moment, has recently begun concentrating its reconstruction efforts on about a dozen priority areas to which refugees are more likely to return. 

            The problems are awesome. Tuzla, for example, has seen its population increase from 100 000 to 160 000 people, with 30% of its buildings destroyed. 

            It is worth mentioning here that the Dayton Peace Agreements foresee the establishment of a Commission for Real Property Claims of Displaced Persons and Refugees.  The Assembly delegation visited the offices of this institution, which is just being opened in Sarajevo.  People who lost their property after April 1992 can make a claim to the Commission for the return of that property, for an exchange of property or for compensation.  Between 600 000 and 2 million claims are expected in due course.  Apart from the sheer magnitude of the task, the Commission will be faced with numerous difficulties, such as trying to trace disappeared property records, making people aware of its existence and ensuring co‑operation from the different parts of the country.  It is also unclear who will eventually foot the bill for the presumably huge compensation sums involved.  Nevertheless, the Commission is an essential tool for bringing back to Bosnia‑Herzegovina a semblance of order so necessary for economic reconstruction. Its work is very sensitive and needs the political guidance of the international community in order to prevent a worsening of the already pronounced ethnic divisions.

            Assistance at "macro" level is as important as that at micro level to restart the economy: generation and transmission of electricity, water supply, communications and transport and the repair of roads.  Restoring these sectors will be necessary to have industry and small businesses resume their activities.

            In a country where planning for reconstruction is almost totally absent due to the ravages of war and the limited authority of the Sarajevo Government, the World Bank fulfils a critical function.  Its objective in Bosnia-Herzegovina is to support a broad‑based rehabilitation of infrastructure and the social sectors capable of jump-starting economic recovery, growth and jobs; to strengthen and rebuild institutions; and to support, in parallel, the transition to a market-based economy.  Its resources will be used as "seed capital" to co-finance projects across a broad range of sectors in cooperation with of a variety of donors, including the Council of Europe's Social Development Fund. The Fund must be encouraged to make greater efforts in providing housing for displaced persons and minorities, including Roma.

            The loans given by the World Bank in Bosnia-Herzegovina are very favourable. They are generally to be paid back within thirty-five years, include a ten-year grace period and carry zero per cent interest. The Bank does not finance projects alone but contributes 25% of the necessary funds, with the international donor community, especially the European Union, supplying the rest. There is close co‑operation with the European Union on various projects, and also contacts with the Social Development Fund of the Council of Europe, which is contributing US$ 5 million toward a refugee and war victim rehabilitation project. (The European Commission contributes considerable resources, notably through its Phare Essential Aid Programme, with a first tranche of 62,5 million ecu to be launched in the very near future.)  

            The World Bank plans its projects on the basis of the work of about a dozen different task forces.  In December 1995 it pledged US$ 150 million earmarked for a first group of seven emergency projects financed from a special trust fund drawn from the Bank's yearly profits.  The emergency projects include: an emergency recovery project; farm reconstruction; water, sanitation and solid waste; transport reconstruction; rehabilitation of war victims; education and district heating. At the time this is written (June 1996), all seven projects have been approved by the World Bank, and a limited disbursement of funds has begun.

            Thirteen additional projects, financed through the International Development Agency (IDA), are under preparation, involving electric power, land mine clearing, public works and employment, local initiatives, demobilisation support and reintegration, gas rehabilitation, housing reconstruction, hospital services, education, transport, forestry, water management and a transition assistance credit. 

            The World Bank action should be seen within the context of the donor pledges made by the international community in two successive conferences in Brussels, totalling nearly US$ 1,3 thousand million.  This is, however, only a small part of the US$ 5,1 thousand million estimated by the World Bank as necessary for reconstruction in the first three post‑war years. (The Bosnian and Herzegovian Government for its part told the Assembly delegation that the country needs US$ 80 thousand million for reconstruction!)

            The World Bank is acutely aware that reaching this US$ 5,1 thousand million sum — or even disbursing the US$ 1,3 thousand million — will, to borrow the words of the Assembly's Recommendation 1297 (1996), "depend on the clear prospect of stability and the good will of all the former parties to the conflict". 

            The Bank is placed before something of a dilemma. On the one hand it wishes to go ahead with the projects, and has actually brought down the time required from conception to approval of a given proposal from some ten months to only two. On the other hand it feels it has to "hurry slowly" in order to ensure the diligent use of resources.  It therefore pays for the projects little by little, in a way reminiscent of the method followed by the International Monetary Fund in certain countries. This is not, of course, to the full liking of the Bosnian and Herzegovian Government in Sarajevo, which maintained before the delegation that not a single penny has yet been forthcoming from any donor, and that "one dollar spent this year is worth six dollars spent next year".

            All in all, however, the World Bank policy seems a reasonable compromise between the urgency of assistance and the need to ensure the best use of scarce resources, on behalf of the donor community but above all on behalf of Bosnia-Herzegovina itself, which will ultimately have to repay the loans. At any rate, of the twenty most immediate projects in the World Bank's Priority Reconstruction Programme in Bosnia-Herzegovina, seven projects totalling US$ 553 million have by now (June 1996) been approved by the Bank, while another thirteen, totalling US$ 931 million are expected to be approved before the end of 1996. Thus, the economic stimulus provided by all these projects should begin to be felt in the country over the next few months.  

            In reply to the rapporteur's question on whether there is sufficient co‑ordination of all the international efforts to help Bosnia-Herzegovina economically, the World Bank said that its task forces were functioning much better than only a few months ago and served as a kind of planning nucleus for the international donor community. However, it said, this did not prevent a certain degree of confusion from occurring at different stages of the assistance process.

            For one thing, the host country authorities, both at national and local level, often negotiate with several donors at the same time, hoping that if one refuses, another will go along. Furthermore, as the Assembly delegation discovered, the Sarajevo Government has little or no say over what happens in, say, Tuzla (not to mention the Republika Sprska or even Herzegovina), rendering nation-wide infrastructure investments difficult to implement. All this can create frustration among donors. 

            Another source of confusion was reported to come from the varied nature of aid sources. Some aid is multilateral (such as through the World Bank, the European Union and the Social Development Fund), whereas other aid is bilateral, that is to say from one donor country, or comes through non‑governmental organisations.  In certain recipient countries this would not have posed so much of a problem, but in a Bosnia-Herzegovina lacking in finances, staff and even physical facilities the absorption capacity to channel aid usefully is quickly reached.

            Another difficulty, previously hinted at, lies in the hesitation on the part of private investors and official donors alike as regards the future political stability of the country, or indeed its future existence.  The World Bank, to allay such fears, has recently approved a special political risk guarantee facility to protect lenders against losses arising from war, civil disturbance or political interference. However, such a guarantee will needless to say raise the cost of financing and may not be sufficient to attract certain potential investors.

            If, on the one hand, the people of Bosnia-Herzegovina need to see rapid economic progress in order to start believing in the peace process, then it is also true that official international assistance must be supplemented by private investment if any sustained development is to be expected. 

            Here the responsibility rests mainly with the host country. In essence, investment will start flowing only if true political stability can be achieved.  It is not enough just to hold the September elections, but these also have to be seen as free, fair and extending to the country's whole territory. The dilemma will therefore be whether to proceed with elections even if these conditions are not met, perhaps not even by far.

            Sustainable economic development will also need effective political authority over the whole country and a firm legal framework within which business can operate.  There will have to be general confidence on the part of investors as regards the country's future.  If this is true for the Sarajevo area, then it is even more valid for two regions also visited by the Assembly delegation: Gorazde, about 100 kilometres south-east of the capital; and Tuzla, about 200 kilometres to the north-east.

            Especially Gorazde's situation is precarious.  It can only be reached by crossing over the territory of the Republika Sprska, in convoys of limited size escorted by IFOR troops three times a week.  Gorazde lacks virtually everything: wood and fuel for heating, electricity and even telecommunications.  The World Bank is preparing the financing of a road across the mountains, within Bosnian territory, for about US$ 60 million, but it will not be ready until in, at the earliest, two or three years.  Meanwhile, no co-operation whatsoever is proffered by the surrounding authorities of the Republika Sprska.  Gorazde will therefore have to rely on support from Sarajevo and abroad for some considerable time to come.  One priority task will be simply to clean up the heaps of garbage littering the banks of the town's waterways, not least considering the risk of an epidemic. With a 90% unemployment rate this would seem feasible.

            The situation in Tuzla is less precarious but still pre-occupying.  Tuzla used to be among the wealthier regions in the former Yugoslavia, with a strong industrial base including advanced chemistry.  Today it is largely paralysed, with a 80% unemployment rate, but unlike Gorazde it is not cut off from the rest of the country.  What Tuzla needs above all is a link to the north connecting it with the rest of Europe.  The city would seem an ideal recipient of funds from the Council of Europe's Social Development Fund, in particular as concerns housing and garbage collection.

            Generally speaking, Bosnia-Herzegovina desperately needs to improve its trade relations with Europe and with the rest of the Balkan region in particular.  Trade between Bosnia-Herzegovina and the Republika Sprska to the east is virtually non-existent, while that with Croatia appears limited in size.

            The foreign debt burden is a considerable obstacle to economic development in the eyes of the government in Sarajevo.  It maintains that 25% of all the aid it receives has to be used immediately to service the foreign debt.  Furthermore, no agreement to reduce or reschedule the US$ 3 thousand million in foreign debt has been reached with the international financial community, such as the London Club.

            The question presents itself whether the international community is supplying sufficient aid to Bosnia-Herzegovina.  On the one hand, the country's economic situation must improve quickly and be seen by the people to do so. On the other hand, much of the assistance may be wasted unless there is a host government capable of channelling the money and making sure that it can lead to a revival of the economy at regional and local level, rather than fall on barren ground.

            There is the further question of whether co-ordination of assistance needs to be improved.  This is surely the case, but who should do it: the international community or the host country? Surely the answer must be that this is primarily the responsibility of the latter, but as we have seen the Sarajevo Government as well as regional and local authorities are seriously overstretched, and there are few links between them. Indeed, the most convincing overall reconstruction concept the delegation saw was the one provided by the World Bank, working intimately with the High Representative, the European Union and others.  Some of the international donor institutions we spoke to also complained that local politics frequently interferes with the planning of projects. The current political problems in the Republika Sprska make it impossible to deliver reconstruction aid there. In Banja Luka, however, such assistance can be helpful to the opposition.

            One step which the European Union could take would be to grant to Bosnia‑Herzegovina so-called "ACP" status, that is, the same conditions for trade and assistance it gives to a host of countries in Africa, the Caribbean and the Pacific.

III: Economic reconstruction in Eastern Slavonia.

            The delegation also visited Eastern Slavonia, that is, the easternmost region of Croatia north of Bosnia-Herzegovina and bordering on the Yugoslav Federation.  This used to be a very prosperous region, rich in oil, agriculture and industry.  The peace agreement for Eastern Slavonia is governed, not by Dayton, but by the so-called Erdut Agreement administered by UNTAES (United Nations Transitional Administration for Eastern Slavonia, Baranja and Eastern Sirmium).

            Unlike the Dayton Agreements, Erdut is extremely detailed, foreseeing strict adherence to various stages.  Implementation is essentially on track and has already resulted in demilitarization, the opening of certain roads, the partial resumption of trade in goods, and the re-establishment of a number of communication facilities.

            It is still too early to talk about any economic development in Eastern Slavonia.  Unemployment stands at 60%, in a population which has swollen to some 150 000 people (half of them displaced).  Oil production, which was continued by the occupying Serb authorities, has recently been halted by UNTAES.

            UNTAES performs admirable work under very difficult conditions, but it needs greater material support from the international community.  Its immediate priorities are the rebuilding of essential infrastructure, job creation, housing and building up an interim administration until the region can be fully reintegrated into Croatia.

            The challenges are thus major, although not insuperable when seen over the longer term.  True, some 250 000 mines still in the ground must be deactivated. International assistance and foreign investment must be attracted. And the future status of the region within Croatia needs to be discussed, ie whether it could enjoy some form of autonomy given its sizeable Serb population. Finally, the fact that three districts of the neighbouring Croatian city of Osijek are still under Serb occupation makes the contribution of that city to the region's development more difficult.

            On the whole, however, the rapporteur is relatively optimistic about the future of this devastated region.  All parties seem to be genuinely interested in implementation of the Erdut Agreement, for they realise that the alternative is further destruction (although, tragically, there is not much left to destroy in the once rich and beautiful city of Vukovar). 

            The respect of human rights will be crucial for the general reconstruction effort.  At the time of writing this the rapporteur has just learnt with pleasure that the Swedish Permanent Representative to the Council of Europe, Mr Henrik Amnéus, has been appointed Chairman of the Human Rights Joint Implementation Committee by UNTAES. This appointment shows the involvement of the Council of Europe in the peace process also in this region, and his work must be supported in every way possible.

IV. Concluding remarks

            Common to the two regions visited — Bosnia-Herzegovina and Eastern Slavonia — is that war-weary populations must see rapid economic results flowing from the peace process.

            Furthermore, those who govern them must be aware that in a world of limited financial resources and urgent needs elsewhere, the international community will over time only be prepared to provide the massive, long-term assistance needed if everything is done by the host country to build on the results already achieved. 

            In Bosnia-Herzegovina the military implementation of the Dayton Agreements has been achieved. However, it has already cost some US$ 6 thousand million, and it is clear that the IFOR troops will not be able to stay forever.  Time for implementing the civilian side of Dayton is scarce and must not be further wasted.  Dialogue and co-operation must replace the deep mistrust between the different ethnic groups and regions that make up today's Bosnia-Herzegovina.  Host country authorities at national, regional and local level must start planning together and utilise the reservoir of energy and talent which even a 42-month war was not able fully to destroy.

            If trust and a minimum of co-operation is not ensured in the next few months, the efforts so far undertaken may prove to have been in vain.  This must not happen. A prolonged IFOR presence would seem essential to allow economic reconstruction to be embarked upon in earnest. The worst that could happen would be, however, if any extra time granted through a prolonged IFOR presence were to be used as ineffectually in rebuilding the country as hitherto. 

            In conclusion: yes, we, the countries of the rest of Europe must continue to help. And yes, everybody in the region concerned must understand that the overcoming of enmity and mistrust, understandable though these feelings may be after a particularly savage war, is necessary for building a more prosperous future.  All the parties to the former conflict are doomed to live side-by-side in the future. Why not make that side-by-side a together?  No lasting development can take place unless words replace gun salvoes.  As the former German Chancellor Helmut Schmidt once said: "It is better to expend a thousand words than to fire a single bullet".

            Reporting committee: Committee on Migrations, Refugees and Demography.

            Committee for opinion: Committee on Economic Affairs and Development.

            References to committee: Order No. 521 (1996) of 25 April 1996.

            Opinion aproved by the committee on 25 June 1996.

[1]. By the Committee on Economic Affairs and Development.