Efficiency and Nationalism

Economic common sense teaches that the introduction of distortions into any market lead to inefficiencies. It stands to reason that when religion and nationality are introduced into the markets of the former Yugoslavia that these elements introduce distortions and that the observable inefficiencies — i.e., 43 per cent unemployment in spite of regionally low average wages and plentiful human and natural resources — must at least in part arise out of the intrusion of religion and nationality into the market place. So, for example, when employers will only hire employees with whom they share a common religion and ethnicity, it follows that the elimination of up to 80 per cent of the potential work force will place downward pressures on wages (and would do so even under much lower rates of unemployment). And, yet, were these assumptions correct then we should anticipate finding correspondingly high unemployment rates in Serbia, Croatia, and Slovenia, where employers also and perhaps even more strictly apply a ethno-religious litmus test to potential employees.

Here are a few representative figures to bear in mind:


As we consider these figures we should recall that, of the former Yugoslav republics, Bosnia and Herzegovina (BiH) is the most ethnically diverse, including within its national borders three ethnically and religiously defined regions: Herzegovina, which is mixed roughly equally between Catholic Croats, Bosnian Muslims and Orthodox Serbs; Republik Srpska, which is solidly Serb Orthodox; and Bosnia, which is predominantly Bosnian Muslim. Croatia has a sizeable Serb Orthodox population located in its Slovonian eastern region, but its declared religion as a nation is Catholic. Slovenia is nearly 100% Roman Catholic. And Serbia too is fairly homogeneous, although less homogeneous than either Slovenia or Croatia

One way to inflect the above figures is to infer that ethnic and religious diversity place downward pressures on employment and debt. The more ethno-religiously homogeneous, the less likely religion or ethnicity will introduce systemic distortions and inefficiencies. And, in matter of fact, some Bosnian Muslim nationalists have argued that did they enjoy the same homogeneity that Croatia, Serbia, and Slovenia enjoyed, they could bring their unemployment down at least to Serbian levels. Serbian and Bosnian Muslim ethno-nationalists have both inferred that the European Union rewards ethno-religous homogeneity, at least when it comes to the successor states of the former Yugoslavia. The most ethno-religously homogeneous gained quick entry into the EU; whereas the more diverse Serbia and BiH have encountered multiple obstacles along the way.

Such arguments rest on the premise that efficiency always has economic efficiency in mind. Yet, what if the product former Yugoslav nations are producing is not capital, but power? Since at least the late 19th century, economic theorists have recognized that politics and economic efficiency bear an inverse relationship to one another: the more active political organizations are in any political economy the more likely their interventions will distort markets and result in economic inefficiencies. This may help to explain why ethno-religiously homogeneous states enjoy greater efficiency and why greater diversity leads to greater inefficiencies. Upon this model, BiH would display the least efficiency because its divided political community is most successful introducing political distortions into markets.

However, there may be still another way to inflect the above figures. Let us assume that the ethno-nationalists are universally the beneficiaries of economic aid. That is to say, given the relative homogeneity of each of the regions in BiH, the three principle ethno-nationalist parties, corresponding fairly strictly to Bosnian-Muslim, Croat-Catholic, and Serb-Orthodox, can count upon a proportional distribution of economic aid to the ethno-nationalist leadership that represents each of the communities. Were this so, then, even if it were in the interests of BiH generally, or each of the republics in particular, to eliminate ethno-nationalist political criteria from economic decision-making, in all likelihood this would not serve the interests of the ethno-nationalist political elite whose claim on their share of EU, US, World Bank, or IMF aid is predicated upon the legitimacy of their representation of a clearly defined ethno-nationalist community. These ethno-nationalist elites would doubtless suffer a reduction in their power were aid to be distributed irrespective of ethno-nationalist identities.

Clearly this is part Prisoners Dilemma and part Moral Hazard. It is Prisoners Dilemma because, while each of the communities is worse off collectively by maintaining its ethno-nationalist militancy, its leadership is better off and, should any of the parties elect to maintain its ethno-religious militancy, as Republik Srpska has by definition and as Herzegovenian Catholics are inclined to do, their decision ensures that all will endure inefficiencies, albeit unequally. And it is Moral Hazard because the incentive structure rewards behavior that is responsible for the distortions and inefficiencies.

However, the important factor to bear in mind is that, while ethno-nationalism has particularly disastrous economic consequences for the general Bosnian and Herzegovinian public, it has relatively positive economic consequences for the ethno-religious political elite. From which, we might derive the following policy implications:

1. If the leading international economic actors (US, EU, IMF, World Bank) wish to effect a reversal of BiH ethno-religious politics and the resulting inefficiencies, they will need to substantially rework the incentive structure that distributes international financial aid through ethno-nationalist channels. So, for example, aid to educational institutions would be predicated on an accurate representation among students, faculty, and administrators of the make-up of the population within the school district. While such efforts to peg assistance to maximal local and regional diversity in public institutions would introduce one kind of political distortion it would eliminate the distortion entailed by the ethno-religiously defined rewards system.

2. The US, EU, World Bank, and IMF should withhold aid from all ethno-religiously defined institutions.

3. Eliminate institutional duplication which, while ostensibly designed to satisfy the legitimate interests of each of the ethno-nationalist communities, has in matter of fact proven little more than a system of ethno-religious political patronage. Local, regional, and national representatives need not duplicate one another’s agencies. Each is best equipped to administer a highly specific set of instrumentalities.

4. Where the US, EU, World Bank, or IMF encourages or supplements FDI (foreign direct investment), the same criteria for broad-based, diverse, hiring and management will have to hold true as applies to public institutions. The international community cannot be in the business of reinforcing the very ethno-religious political distortions that it simultaneously is seeking to eliminate.

5. The international community will need to find robust means — e.g., freezing foreign bank accounts and seizing assets of agents — to alter the incentive structure for members of the ethno-religious political elite. Such robust strategies will be specially important in effectively phasing out the ethno-religious dimensions of the Dayton Peace Accords. Ethno-religiously defined political institutions or procedures cannot be permitted to persist. Political agents found cultivating these instrumentalities or resisting their phasing out will need to understand that their are severe financial consequences to their failure to cooperate. They need also to understand that diversity enjoys economic rewards. Citizens and investors need to be reassured that the protections they enjoy under the law are not predicated on their ethnic or religious identity and that their economic and social well-being is a right guaranteed to all citizens.

This list is by no means comprehensive. But it does provide an important first step in the right direction. It contrasts with the IMF imposed labor law recently passed in Sarajevo, whose overall effect will be to strengthen the hand of the ethno-religious political elite and weaken civil society.