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Bureaucracy, Corruption Plague Foreign Investment in Bosnia

Europe: Pioneers in the postwar marketplace are frustrated with high taxes, plethora of ever-changing laws.


SARAJEVO, Bosnia-Herzegovina — By every measure, the Internet Cafe here is a wild success.

Sales are enormous. Tables and the bar are packed night after night with high-spending customers. Lunches and Sunday brunch are standing-room only. Business in Bosnia just doesn't get any better than this.

So why is cafe owner Morgan Sowden, a Briton, bailing out?

"Either I cheat or I give up," he says.

Sowden and people like him--pioneers in investing in today's Bosnia-Herzegovina--are confronting exorbitant taxes, burdensome bureaucracy and multiple layers of ever-changing laws that combine to gut even the most successful of enterprises.

Incompetence, corruption and a legacy of 40 years of communism are discouraging foreign investment in Bosnia just at a time when postwar recovery so desperately depends on it.

The rest of Eastern Europe and the former Soviet Bloc spent most of this decade in the painful but profitable transition from state-controlled socialism to free-market capitalism. Now Bosnia is trying to undertake, belatedly, the same post-Communist economic reform while also recovering from a civil war that destroyed infrastructure, idled factories and gave rise to a powerful black market.


Thanks to reconstruction aid, Bosnia's economy is growing by about 30% a year. But more than two years after the war ended, progress on the economic reform front is glacial, as one diplomat put it. The danger for Bosnia is that potential investors, who initially were willing to grant Bosnia some slack, will begin to grow restless as they see that other countries offer much friendlier business environments.

"The future of this country is in foreign investment," said senior government spokesman Mirza Hajric. "We want to be an attractive country, and we know we will lose the interest of [Western] companies if we can't create [proper] conditions."

Such good intentions, however, are not readily fulfilled. U.S. advisors are working to train Bosnians in everything from basic bookkeeping to the restructuring of the economy. But crucial laws governing privatization, property ownership and foreign investment are meeting vocal resistance from nationalist leaders on all sides who are determined to keep a grip on the economy. Indeed, most of Bosnia's economy remains in the hands of the state, ruling political parties and their privileged cohorts.

And disputes among Bosnia's Muslim, Serb and Croat factions blocked two essential tools in the building of an economy: a national currency, which was finally imposed early this year by international mediators, and railways, which still cannot cross ethnic lines.

U.S.-brokered peace accords in December 1995 ended the 3 1/2-year Bosnian civil war and formalized the division of the country into two autonomous "entities": the Muslim-Croat Federation and the Bosnian Serb Republic, also known as the Republika Srpska.

With the Serbs only recently beginning to cooperate with the peace accords, most potential foreign investors have been focusing on the Muslim-Croat half of the country and its capital, Sarajevo.

Sowden, the Internet Cafe owner, represents the difficulties faced by small and medium-sized businesses.

Already well-versed in doing business in Eastern Europe after a stint in Prague, Sowden took an early gamble on Bosnia. Arriving just a month after the war ended, he expected hardships. He planned for the lack of regular water and electricity, keeping buckets on hand for flushing the toilets and making sure the bar had backup lighting. He stored beer outside during winter months in order to have a permanent supply of cold bottles.

What he did not expect was the layer upon layer of bureaucracy and the seemingly deliberate way the government had of making it impossible, and expensive, to do business.


Make that governments, plural. In its postwar development, this half of Bosnia has created jurisdictions at the city, canton, entity and state--meaning all of Bosnia--levels, each of which has some form of taxation and regulatory powers. Because it is all new, laws at different levels sometimes contradict one another and are extremely complex.

As a consequence, Sowden recently found himself hit with a retroactive tax bill going back to 1996. Authorities simply changed their minds about whether a particular duty was applicable to his business, Sowden said.

He was also assessed a payroll tax equal to a full 85% of his employees' salaries and seven taxes on alcohol totaling roughly 20%, and he must pay 36% to 51% tax on his profit annually--in advance. If he cheated and hid full-time employees or low-balled his profits, he could get off with paying a lot less.

In the end, the law does not allow him to send home to London more than the equivalent of about $1,100 a month. Rather than continue to fight the bureaucrats and lose money, Sowden has decided to hand the popular cafe over to his 25 employees and walk away.

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