An agenda for the Federal Reserve’s review of its monetary policy framework


An agenda for the Federal Reserve’s review of its monetary policy framework


Why growth matters in fighting poverty in Bosnia and Herzegovina

Twenty years since the Dayton Accords brought peace, Bosnia and Herzegovina still suffers from high poverty. In post-Dayton Bosnia and Herzegovina (BH), economic growth and poverty reduction went hand-in-hand and, by 2007, poverty had declined to 14 percent (even though average income levels remained lower than in the Yugoslav period). Yet, since then BH has struggled to reduce its poverty burden, with poverty reduction stagnating. In 2011, up to half of BH’s population were deemed at risk of poverty or social exclusion—a rate higher than all European countries except Bulgaria.

BH’s difficulty in fighting poverty and exclusion matters both for BH and for other counties. The poverty threshold is based on the cost of minimum calorie requirement and other life essentials such as fuel for heating and cooking, basic healthcare and transport costs. In BH, 15 out of every 100 people can’t afford these basic life essentials. It is no wonder that 45 percent of asylum seekers to Germany come from the six Western Balkan countries, including BH. Their main reasons to seek refuge are not political but economic and the implications were discussed recently at a European Union summit on the Western Balkans. But now we are in a position to better understand who the poor are and identify policies that could help at least some break out of poverty.

How one half lives

On the face of it, the profile of the poor in BH is as you would expect it. As we noted in a previous Future Development blog post, a rural dweller is twice as likely to be poor as his or her urban compatriot (with poverty rates of 19 versus 9 percent). Those with no or only primary education are twice as likely to be poor as those with secondary education. Closely connected to education is employment; the unemployed and inactive are more likely to be poor than others.

Delving a little deeper into the data is helpful:

  • Jobs translate economic growth into sustainable poverty reduction, and female employment is especially important in determining whether a household is poor. All families tend to benefit from economic growth in BH, and wage income brings these gains to households. A third of the increase in income of the poorest 40 percent of the population came from wage income during the period of economic growth of 2004-07. Low labor market participation by women from poor households limits their gains from economic growth. Among households in the poorest 40 percent, females are much less likely than males to be in the labor market (15 versus 42 percent). Among the wealthiest 60 percent, 32 percent of women are active in the labor market.
  • Children are much more likely to be poor than adults, with 22 percent of children living in poor families. Put another way, people in large families are poorer than smaller families. This is concerning because there is a significant risk of intergenerational poverty transfer, and rural families are most likely to be affected. BH has the lowest rates of preschool education (which matters considerably for children’s chances of escaping poverty) in the region, and preschool education is almost nonexistent in rural areas. This gives children little chance of escaping poverty and gives those mothers with the skills and desire to work little ability to do so.

How the other half can help

Understanding these basic facts about poverty can help BH provide the poor with more opportunities. Good policies that promote economic growth and employment would benefit the poor. This includes reducing the high tax burden that workers and firms face and making it easier to do business. Other policies that could help include:

  • Tackle a very high tax burden for low-income employees (those earning just 100 euros per month pay a third in social contributions);
  • Refocus the social welfare system on protecting those who most need it—including children—at the times they most need it, notably during economic downturns;
  • Expand access to early childhood education and childcare; and
  • Promote lifelong learning based on the skills required by firms.

Regular data collection would make it easier to identify policies to help the poor and, thanks to BH’s strong revenue collection capacity, it would have resources to support the poor and design pathways out of poverty. Targeting those resources toward those really in need (especially in crises) would go a long way toward making life better for the poor.