After the second world war, many countries in Eastern part of Europe became part of the Union of Soviet Socialist Republics (USSR) headed by Russia. These countries embarked on a socialist path of economic development, which was entirely different from the rest of the world. After the dissolution of the USSR, countries like Bosnia and Herzegovina had to transition from a closed socialist economy to a market driven capitalist economy under terms dictated by international bodies like International Monetary Fund (IMF) and World Bank. This created conflict with socialist countries’ economic structure of social welfare schemes and cash transfers. A significant part of the government’s expenditure is spent on continuing the existing welfare schemes which leaves very less for investment and infrastructure development. As a result, the economy is only driven by domestic consumption while production lags behind. External loans continue to pile up, further increasing the country’s total debt. This paper is an attempt to study Bosnia and Herzegovina’s economic transition after the second world war. While the transition from socialism to capitalism is considered as a boon by many economists, this paper finds that, for countries like Bosnia and Herzegovina, it is exactly the opposite. Economically successful socialist countries in the latter half of twentieth century had robust social security measures such as cash transfers to the elderly and unemployed. However, the advent of capitalism signaled the wastefulness of such social security benefits. There exists, and will always exist, a conflict between abandoning socialist economic policies and embracing market driven capitalist policies. Thus, this paper seeks to study the economic changes in Bosnia and Herzegovina emanating out of the transition from socialism to capitalism.

Socialist, Welfare, Consumption, Budget, Public Sector.