A review of my book, “One Currency for Bosnia”

The Weekly Standard March 9, 2009


Cash for Balkans
A sound currency is the least of Bosnia’s problems.
by Stephen Schwartz
03/09/2009, Volume 014, Issue 24

One Currency for Bosnia
Creating the Central Bank of Bosnia and Herzegovina
by Warren Coats
Jameson, 349 pp., $42.50

Thirteen years after the Dayton peace accords that ended the combat in Bosnia-Herzegovina, and almost a decade since the end of the NATO intervention in Kosovo, these two Balkan examples of American-supported "nation-building" seem about to reappear on the political horizon. And Clinton-era figures now prominent in the Obama administration–Joseph Biden, Hillary Clinton, Richard Holbrooke–are all apt to preen about their exploits in Southeast European conflicts. So with the reappearance of Americans associated with the Balkan torment as policy wizards, it makes sense to examine what has transpired in Bosnia and Kosovo since the onset of Western involvement.

Warren Coats, who had 26 years’ service as an economist for the International Monetary Fund, has published this densely detailed but instructive account of how, with his participation from 1996 to 1999, divided Bosnia was provided with a modern financial system by the international community that had assumed responsibility for that badly wounded country’s future.

Textbooks and similar authoritative chronicles of the practical transformation of onetime Communist economies, deformed or disfigured by years of ideological interference, are rare. Coats brought to his work in Bosnia a background that included experience in Bulgaria and Moldova–two deeply corrupt states that, although they did not suffer the bloodshed seen in Bosnia, were (and remain) economically and socially handicapped–as well as in the Palestinian territories. He later worked in Kosovo, Serbia, and Turkey.

He patiently recounts the travails required for the confection of a hard currency, the Bosnian convertible mark or KM. It replaced the Deutsche Mark, which was used as Bosnian money immediately after Dayton, and at the end of 2001 gave way in Germany to the euro. This is an irreplaceable contribution to the study of post-Communist finance.

Coats and an army of international advisers and mentors, including personnel from the Agency for International Development, had to contend with many obstacles in the creation of a Bosnian currency, a policy objective mandated by the Dayton agreement. Serbs, now as then, occupy more than half of Bosnian territory as a statelet that was the model for Moscow’s puppet regimes in Abkhazia and South Ossetia. Croat representatives had their own claims on turf and practice. Bosnian Muslim representatives, like their ethnic peers, were encumbered by a socialist centralized "payment bureau" system that substituted for normal banking.

As Coats describes it, the domestic payment law in the Muslim-Croat federation making up the rest of Bosnia "was confusing, internally inconsistent, and at variance with actual practice." The payment bureau acted as an intermediary between financial clients and the banks. The international advisers did not consider the payment bureau to be a holder of deposit liabilities, but the functionaries of the Federation Payment Bureau viewed their outfit as a central bank.

Transferring the daily cash operations required by Bosnian businesses from the payment bureau to a brand-new Central Bank of Bosnia-Herzegovina–intended to function at an international standard and succeeding the former National Bank of Bosnia-Herzegovina–had to be accomplished without the new institution enjoying credit resources to cover overdrafts.

Such issues are as daunting for the lay reader as they were (in Coats’s narrative) for him and his colleagues. Coats acknowledges the useful counsel of Steve Hanke, the libertarian economist, who noted that a "currency board" crafted for Bosnia by the international community, which should have kept a strong hand on financial operations, included too many loopholes that prevented it from promoting monetary stability. Nevertheless, overcoming limitless barriers, Coats and his team succeeded in establishing the KM as a solid currency, with "culturally neutral" paper money designed to be acceptable among Serbs, Croats, and Bosnian Muslims. Coats describes the introduction of the KM as "an enormous success," but Bosnia’s financial restructuring failed to solve serious problems of lawlessness.

He describes as "depressing" the spectacle of Bosnian political obstruction of privatization of state banks and other financial reforms. In addition, because of persistent ethnic rivalries and the hoarding of KM coins, the definitive acceptance of the KM as Bosnia’s money was held up for years.

Unfortunately, such minor issues as the scarcity of paper and small metal change don’t figure in a study written from the viewpoint of an "international," as foreign administrators are known in the Balkans. But this is predictable:

Coats shuttled in and out of Sarajevo without having to deal with the frustrations of daily economic life in a deeply traumatized, ex-Communist country. Until recently, the worst thing anybody living in Bosnia could do was to offer a bill over 10 KM as payment for any item: Ne imam sitni (I don’t have change) was the infuriating response of Bosnian service and clerical employees to any such tender. Under the payment bureau system, merchants were required to settle their accounts daily, and this was a pretext for starting business each morning without the small "bank" used to make change in any normal store. Some Bosnian retail clerks were so primitive in their outlook that they would not accept bills that had slight tears in them!

Bosnia was lucky that dedicated professionals like Coats came and fought their way through thickets of intrigue and obstinacy to create a central bank. Nobody sane, in a country undergoing nation-building, would reject such a glittering asset, and Coats rightly expresses satisfaction that Bosnia was the first ex-Yugoslav republic to replace the old central payment bureau system–although it embarked on the path to modern banking later than others. But now that the "Bosnia crowd" are restored to power in Washington, should we ask how such efforts have improved the lives of Bosnians?

As a consequence of the neglect of Bosnia’s social rehabilitation, the country has become a field for the expansion of radical Islam. When Dayton was signed–imposing what increasingly looks like a permanent partition–"Afghan Arabs" who had gone to the country to pursue extremist jihad were only a minor element: Some 6,000 of them, at most, joined the Bosnian struggle, but comprised no more than a rivulet in the wide stream of armed Bosnian resistance. These mujahedeen won no battles and otherwise never influenced the outcome of the fighting, and their Saudi-sponsored Muslim missionary work was met with hostility by indigenous Muslims dedicated to moderate Sunnism.

Today, however, after so many years of endemic unemployment, and with the growth of a Muslim mafia, Bosnian Muslims find their capacity to resist extremist blandishments seriously weakened. The country’s top Islamic cleric, Mustafa Ceric, has revealed an almost limitless capacity for self-aggrandizement. Parading in white robes with gold brocade trim, Ceric travels around Europe and visits the United States (where he formerly acted as an imam in Chicago) projecting himself as a candidate for an Islamic papacy, and delivering speeches, empty of serious content, on interfaith cooperation.

As 2008 wound down, Ceric generated a new, bitter controversy with a plan to erect a massive residence for himself on a hill overlooking Sarajevo. The Bosnian poet Semezdin Mehmedinovic accused Ceric of paying for his new palace with money from Bosnian Muslim and ethnic Albanian gangsters. Ceric’s building project has also elicited protests by students at the Sarajevo Faculty of Islamic Studies (who lack a dormitory) and condemnation from less prominent, but more respected, clerics. The latter include Mustafa Spahic, preacher at the Cobanija mosque, and his colleague as a professor of Islamic studies, Resid Hafizovic, one of the world’s outstanding scholars of Sufism.

Asked about the spread of Wahhabism in the country, Hafizovic has warned pointedly against "the uncontrolled operation of an unacceptably large number of madrassas and Islamic universities .  .  . [a] threat and betrayal of quality in the educational institutions of the Islamic community."

Notwithstanding an excess of Islamic schools, Hafizovic continues, "we see the paradox that Bosnian Muslims, instead of being freer in spiritual terms, more creative, self-confident, and intellectual, today find themselves in a condition of utter spiritual enslavement, crippled, and intellectually castrated."

Coats’s account of Bosnian economic reform shows the bright side of nation-building. But those who have seen the realities of Bosnia in the streets of Sarajevo must conclude that something more than foreign generosity and expertise is required to rescue countries from dictatorship and war.

Stephen Schwartz is the author, most recently, of The Other Islam: Sufism and the Road to Global Harmony.

Hi from Nairobi, Kenya

I am entering my third and last week of this visit to Nairobi. This time I am here for the IMF to provide assistance to the Central Bank of Kenya’s implementation of its monetary policy (it follows a monetary rule). This visit comes exactly two years after my first, which was for a regional meeting of the Mount Pelerin Society. So I looked back to see what I had said about that earlier visit. To my surprise, I had come last time from Kazakhstan with a pleasant stop over in Istanbul. This time I am traveling on to Kazakhstan, with a week in Amman, Jordan for meetings with the Central Bank of Iraq in between. And the President of Turkey is here in my hotel. I had breakfast with him this morning, sort of (from across the dinning room). Who would have imagined such a connection between Kazakhstan, Kenya, and Turkey.

Nairobi is a nice city of high and low rise buildings among many parks and a population of almost 4 million. It has too many cars and bad traffic. Its altitude of 5,450 ft above sea level is too high for malaria carrying mosquitoes. Its two rainy seasons produce a beautiful green country side with exotic and beautifully shaped trees the likes of which I have only seen in Africa. Kenya is near the equator and always temperate but February enjoys particularly good weather, which is generally clear and in the upper 70s during the day and the low 70s in the evenings.

I walk the five blocks between my hotel and the Central Bank each morning and afternoon. I took special note the other day that during my walk back to the Intercontinental I did not see one white face among the thousands I passed on the street. Inside my hotel is another matter. The Kenyans I have met are very friendly and helpful, often sensing correctly that I am lost (generally within the Central Bank). They are very open and easy to talk to, something highly valued in my profession of advisors. Everyone speaks English fluently.

A few days ago I meet with eight members of the Association of Financial Market Dealers to discuss the trading of government securities and a new inter bank repo (purchase/repurchase agreements for government securities). The issue was why this new instrument, which had been several years in preparation, had not yet traded. Like dealers every where in the world they were young and full of energy (or vinegar as my grandfather used to say). They were not shy about identifying this or that problem. At the end of our meeting the head of the Association, a witty, quick talking young man in his mid to late 20s, smiled and said: “Yes we can.”

On several occasions I was asked where I was from. Upon replying “America,” my questioners would smile and say something like, “You know that your new President is our brother.” It is nice not having to claim to be Canadian any more. No offense Bill.

Comments on Obama’s lost opportunity

Hi from Nairobi Kenya

Last week I communicated my disappointment that President Obama had lost the moral high ground by standing by several appointees to his cabinet who have violated tax laws and my relief that he acknowledge that he had goofed. Here are some interesting comments from some of you.


You are giving them too much credit.

RWR (Richard Rahn, Great Falls, VA)


Dear Warren,

He may have confessed to screwing up, but he still didn’t withdraw the nomination of Geitner. 

And now he’s limiting compensation to $500,000 for execs.  This reminds me of the notorious $1 million limit on tax-deductible exec pay in the early 1990s, which caused the crazy stock option boom (unintended consequences). 

There’s no free lunch.

Best wishes, AEIOU,

Mark (Skousen, Freedom Fest, Los Vegas)



I like the idea of the Rangel Rule for other Americans … a loophole for the ordinary.

Bill (Crosbie, Canadian Foreign Ministry, Ottawa)


This was said AFTER the Secreatry of Treasury was confirmed WITH tax issues.

Donna (Wiesner-Keene, Alexandria, VA)


Enjoy the warm breezes.

I agree and share the outrage and dismay at public figures — in the financial world, so they have to know better–assuming they are above the tax laws, while we the sheep dutifully calculate our pittance and pay up.  Obama (and the Pope, in his sphere)  need to listen up.  Regards,

Dorothy (McManus, Alexandria, Va)


I have a bit different take on it.  The indiscretions were minor in my opinion, but Obama made such a thing during the campaign about style and process (change you can count on; doing things differently in DC; no lobbyists in government) he has now been caught on his own campaign rhetoric.  When substance should matter ("Hey! I really need him for the health agenda"), he has no choice but to dump Daschle because he told people to watch the style and process, not the substance, of his administration.  So…we’re watching.
Jim (Kolbe, former U.S. Representative from Arizona)


I am a fan of President Obama but, frankly, it’s a bit creepy to have a Secretary of the Treasury who’s a tax cheat.  TOM (Lauria, Arlington, VA)


Yes, a pity that he had to do that within the first few days of his administration.  After all he has to rely on his advisors to check things out for him who obviously let him down.  Great that he still accepted responsibility instead of passing the buck to his juniors.  I trust the American public will see that.

I see your "retirement" is a busy one….

Cheers, Sam (Alfreds, Victoria, Australia)



Geithner and Daschle were trapped in a sudden tectonic cultural perception shift, Daschle with greater negative impact.  This was accurately and hilariously identified by David Brooks in his excellent op-ed item in the Feb. 3 New York Times.  q.v.:


I was watching Lehrer’s News Hour a week or so ago, and some Wall Street type seemed perplexed about the massive bonuses provided to high level employees of various failing banks and financial houses.  "It’s been done that way for years," he said (or words to that effect), thus revealing the cluelessness of the malefactors of great wealth.  As Talleyrand said of the Bourbons, "They have forgotten nothing and learned nothing."  The same is true, I might add, of the Democrat Caucus in the House.  They are permanently stuck, like a fly in amber, in about 1978.

Enjoy the Caymans — it’s utterly frigid here.  Dinner when you return?

Tom (Neale, Washington, DC)



I too was pleased with Obama’s mea culpa, and the limousine liberal’s withdraw – but wonder why he was first so willing to fall into the typical cover-up and fight mode.

I also think this salary cap is a bunch of smoke and mirrors nonsense.

All in all, the groundwork is being laid for quite the ambitious administration. 

Rob (Teir, Houston, Texas)

"I think that God in creating Man somewhat overestimated his ability."

-Oscar Wilde


Hi Cayman Warren,
you have probably seen the enormous assault on health care "reform" by the Obama administration.
Do something, please …
And hope to see you in DC or Paris before long.
Very best, J. (Jacob Arfwedson, Paris, France)