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.