The Whetstone Freedom Fund (WFF) is an international initiative founded by the Institute of Economic Affairs in honour of the late Linda Whetstone, to support classical liberal ideas around the world. Each month on Insider we take a deep dive into the countries and partnerships which are being supported by the WFF.
Decentralisation is powerful but risky. Done correctly, it can be a shot in the arm for freedom, dynamism, and prosperity. Get it wrong and you risk amplifying local tyranny, division, and chaos.
Nowhere is this delicate balancing act clearer than Bosnia and Herzegovina, a country forged in ethnic tension and unfathomable violence. After the bloody breakup of Yugoslavia, Bosnia has secured and sustained a fragile peace through radical decentralisation. Its unique system has created a fascinating natural experiment with two competing institutional frameworks in one nation: one highly decentralised and the other rigidly centralised.
To tell the country’s story and highlight the benefits and drawbacks of its institutions, this piece will focus on the work of Association Multi, the Bosnian partner of the IEA’s Whetstone Freedom Fund.
The modern state of Bosnia and Herzegovina was forged by devastation and division. Amid the bloody breakup of Yugoslavia, the multiethnic republic was itself torn apart by ethnic warfare among its three main constituent peoples: Bosniaks, Serbs, and Croats.
Unspeakable war crimes were committed by figures on all sides of this conflict and the wider Yugoslav wars. But the systematic ethnic cleansing of non-Serbs in territory controlled by the Bosnian Serbs made the situation impossible for the world to ignore. After the Srebrenica massacre, the worst mass killing on European soil since World War II, was committed by Bosnian Serb forces against over 8,000 Bosniak men and boys in 1995, NATO launched an intervention to support Bosniak and Croat forces.
This resulted in the Dayton Peace Accords being signed in 1995 by the leaders of Serbia, Croatia, and Bosnia. The Accords established Bosnia and Herzegovina (BiH) as a nation based on power sharing and decentralisation.
One of the Accords’ key provisions was the creation of two constituent ‘entities’ (somewhat equivalent to American or Australian states or Swiss cantons): Federation Bosnia and Herzegovina (FBiH), mostly made up of Bosniaks and Croats; and Republika Srpska (RS), dominated by Serbs.
Bosnia has become a fascinating case study because the two constituent entities have created a natural experiment in the outcomes of centralisation vs decentralisation. Being a multiethnic entity, FBiH is highly decentralised, with 10 regional cantons creating another layer of governance between the BiH federal government and FBiH government above, and local authorities below.
While the entity governments are the most powerful and autonomous governing institutions in the country, FBiH’s cantons have wide decision-making authority and extensive fiscal autonomy. By contrast, RS is extremely centralised, with most decision-making, revenue raising, and local government budget-setting taking place in Banja Luka, the entity’s de facto capital.
A 2018 study by economist, FBiH MP, and Association Multi founder Dr Admir Čavalić sheds light on the tangible impacts of decentralisation in FBiH compared to the highly centralised RS.
FBiH’s GDP per capita is around €400 higher than in RS. Čavalić explicitly recognises that this is the product of myriad factors beyond centralisation. But a closer look reveals some significant strengths of FBiH’s decentralised model.
One example is public sector debt which is 81% higher in RS than FBiH. This demonstrates the inherent check that decentralised governance provides against accumulating significant debt. While FBiH citizens have a higher average tax burden than their counterparts in RS, lower debt and more controlled government spending, combined with greater local accountability, makes it far more difficult for governments to implement stealth taxes or pass the burden of spending to the next generation.
Tax burdens also vary significantly by canton in FBiH, allowing citizens the right to exit jurisdictions if they wish to escape high taxes and poor services.
In healthcare, Čavalić explains that there is greater diversity, competition, and quality in FBiH but health insurance is cheaper in RS. This trade-off, he explains, is the product of decentralisation making it more difficult to apply economies of scale to complex industries because of the need to comply with complex and varied regulations in different cantons. In some cases, RS’s ability to spend more freely also artificially reduces the cost of some oft-used healthcare services.
One additional benefit of FBiH’s system, however, is that the costs of strikes by healthcare workers are much lower because their impact is localised to cantons, rather than spreading across the whole entity as is often the case in RS.
Beyond pure economic outcomes, Čavalić identified the significant benefits of decentralisation in FBiH for depoliticising certain cultural and ethnic controversies. In recent years, Bosnian LGBT+ individuals have found a safe-haven in Sarajevo which better protects their civil and political rights than Republika Srpska or more conservative cantons in FBiH.
Education, Čavalić explains, is much more diverse and choice-oriented in FBiH compared to RS. In a country where teaching of history and certain social topics is incredibly heated, the right to exit is vital to ensuring that education is less politicised than it otherwise could be. In many cantons, there is vibrant diversity of both private and state education. Even in cantons which ban or restrict private schooling, parents still have the right to ‘vote with their feet’ by moving to a canton with different policies. That competition also has positive impacts on educational outcomes, with FBiH’s basic and higher education systems clearly outperforming those in RS.
On social issues more broadly, the decentralisation of both BiH and FBiH do a remarkably good job of protecting individual rights and reducing zero-sum political conflicts over identity. It is incredible that a country like Bosnia, defined by ethnoreligious division, scores so highly in areas like identity and relationships (9.3), security and safety (9.0), religious freedom (8.8), association (8.8), and expression and information (8.7) according to the Human Freedom Index.
As Čavalić concedes, decentralisation does come with costs and trade-offs. But in terms of protecting basic individual rights, maximising economic competition and choice, and minimising zero-sum political battles over culture and history, FBiH’s model produces impressive outcomes.
In summary, he wrote:
“This is precisely the main feature of decentralised systems that appear to be fragile at first, but are still much more stable in the context of extraordinary shocks compared to centralised systems.”
One of the inherent trade-offs of decentralised institutions is increased inequality of outcomes. Because countries, regions, municipalities, and individuals vary significantly in their abilities, preferences, and circumstances, giving them more control over decision-making will naturally result in more varied outcomes.
Across the West, this has been one of the chief criticisms of free market capitalism. In the United Kingdom, decentralisation is often stymied by instinctive resistance to the idea of ‘postcode lotteries’, whereby outcomes vary depending on location.
Both of these criticisms are also prominent in Bosnia’s intellectual, cultural, and political discourses. In 2022, Association Multi partnered with Linda Whetstone’s Network for a Free Society for a project to change the climate of opinion around the issue. They translated the IEA’s An Introduction to Economic Inequality by Eamonn Butler into Bosnian and promoted the ideas of the book across the country.
The project aimed to push back on the dominant narrative about inequality and argued that unequal outcomes caused by increasing freedom and decentralisation were neither immoral nor economically damaging.
Commenting on the release of the book, Admir Čavalić said:
“Simply put, this concept [economic inequality] leads to misguided solutions or economic policies that, in the long run, do not bring us closer to the vision of equality, but rather to its opposite—equality in poverty.”
Multi aimed their project squarely at Bosnia’s opinion formers, hosting in-person panel events for students at the University of Sarajevo and intellectuals at the influential Bosnian Cultural Center in Tuzla. To supplement these flagship launch events, Multi also hosted a series of online book clubs and incorporated the book into their existing education programmes across the country.
Through in-person distribution and online promotion, over 10,000 Bosnians accessed the book, while its ideas reached over 50,000 through traditional media hits and social media. As well as leaving a lasting resource for Bosnian students and intellectuals, the translated book is also accessible to Croatians, Serbians, and Montenegrins whose languages are almost identical to Bosnian. Indeed, the Serbian think tank Libek also incorporated the book into its academic and policy outreach programmes.
In a country and region scarred by ethnic, religious, and geographical collectivism, an alternative vision based on individual liberty, free markets, tolerance, and the rule of law is sorely needed. Multi is leading the charge to do just that.
