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COMMENT: Can Kosovo Be Economically Viable?
28 May 2007
The
credible case for Kosovo’s independent viability acknowledges and
confronts existing challenges
By
Muhamet Mustafa in Pristina
Can
Kosovo be economically viable?
The question is posed frequently to test the notion of
Kosovo’s future political independence. Is Kosovo big enough? What
about its natural resources? What about its present and potential
levels of development?
To
opponents of Kosovo independence, the viability question and all the
questions that fit within it are rhetorical. They presume a negative,
speculative context.
Pro-independence
Kosovars respond justifiably that size is relative. Evidence abounds
that small can be beautiful. The success stories of small countries
are as varied as Hong Kong, Liechtenstein, Luxembourg, Monaco and
Singapore.
We
also respond with another rhetorical question: who will ensure
economic viability if not Kosovars themselves?
History
shows that the prosperity of Kosovo has been proportionate to its
people’s ability to govern their own affairs and also to the level
of political stability. This principle hold true across the western
Balkan region.
Sovereignty
and government lie at the heart of the matter. The limited
participation of Kosovars in government has negatively impacted
growth and viability, and no good answer to the broad viability
question can ignore this reality.
Yet
the question of Kosovo’s economic viability also deserves a more
detailed analysis of human and natural resources in the current
policy environment, with an eye to identifying risks and maximising
competitive advantages.
SEEKING
GROWTH
The
current policy environment is far from ideal. The initial post-war
reconstruction boom faded away when the United Nations Mission in
Kosovo (UNMIK) and the Provisional Institutions of Self-Government
(PISG) failed to establish conditions for stable and lasting economic
growth.
Although
a basic legal framework for business was put in place, enforcement
mechanisms were not. Progress in this area has not been analysed
sufficiently with regard to key elements such as contract
obligations. Non-compliance with UNMIK/Kosovo law in northern Kosovo
and minority enclaves adds additional complication.
The
consequence is a strained market. Surveys between 2000 and 2006
indicate that the small and medium-sized enterprises (SMEs) so
heavily represented in Kosovo’s economy see many barriers to
business: unfair competition, insufficient legislation, corruption,
taxation and limited access to finance, amongst others. Their
practical sense of insecurity about business in Kosovo is magnified
by the lack of clear political status, and shared broadly by
international financial institutions, potential foreign investors and
trade partners.
There
is positive some movement. Euro-based financial transactions have
contributed to macroeconomic stability. Inflation has stayed low
while, from November 2005, deflation was associated with a negative
growth rate. The budget is moderate in relation to GDP - 26 per cent
on the revenue side and 28.5 per cent on the expenditure side, with
the difference financed from a cumulative cash surplus. Credit is
also moderate at 16 per cent of GDP.
But,
if present circumstances persist, things are likely to get more
complicated in the medium to long term. A critical imbalance persists
between gross domestic product (GDP) and consumption. Another is
found between budget funds and capital investments required. Foreign
trade and the labour market also exhibit imbalances.
This
situation is primarily a consequence of industrial collapse and
disinvestment during the 1990s, which eviscerated exports. Between
1991 and 1998 exports dropped from $212 million (not counting the
trade with other Yugoslav entities) to $38 million, and industry’s
share of GDP fell from 47 per cent to 15 per cent.
The
legacy is one of systemic failure. Low-level economic growth means
slow job creation, yet the labour market sees an inflow of some
25,000 new job-seekers each year. Already, with unemployment soaring,
83.1 per cent of Kosovo’s unemployed has been jobless for more than
one year.
Yet
paradoxically there is much work to do. Electricity remains
unreliable despite the theoretical availability of ample low-cost
domestic supply, which needs better management. Telecommunication
services remain sub-standard under a public monopolist and should be
improved. The mobile telephony monopolist licensed by UNMIK charges
some of the highest prices in Europe, so competition should be
welcomed. Transport links both within Kosovo and between Kosovo and
major European traffic corridors need enhancing. Any and all of these
tasks would pay off handsomely.
Only
with strong long-term economy growth can such serious structural
challenges and imbalances be resolved, and only under these
circumstances can Kosovo take the ambitious step from reconstruction
to new construction.
‘WHAT
IF’ SCENARIOS
In
an effort to provide an analytical basis for Kosovo’s development
strategy, Riinvest Institute has examined a variety of ‘what if’
scenarios. These scenarios take current realities and apply lessons
learned from other transition economies, emphasising key factors
influencing investment and competitiveness.
In
every case, the scenarios have indicated that political and
institutional developments are key, yet not all the outcomes
predicted are the same.
For
example the ‘status quo’ scenario, in which resolution of
Kosovo’s political status is delayed, or if its economic reforms
calendar is slowed down, forecasts stagnation or economic growth of
no more than 1-3 per cent per year. The likely consequences of this
scenario would be increased political and economic instability, as
emigration pressures grow and problems of poverty and unemployment
persist.
By
contrast, a 5 per cent growth scenario in which Kosovo’s political
status is resolved would yield improvements. However it would not be
sufficient to meet the immense demand for new jobs, nor would it
boost Kosovo’s international competitiveness.
Only
a more dynamic growth scenario, in which the economy grows 7 per cent
annually, is likely to help Kosovo overcome its deep imbalances. The
experience of many countries suggests that this scenario will require
improvements in education, financial management, trade openness and
public infrastructure. Meanwhile excessive tax burdens, negative
terms of trade and other generators of macroeconomic weakness must
go.
Such
change requires institutional capacity that Kosovo currently lacks.
TEMPLATES
FOR TRANSITION
Yet
a successful transition is possible. Several central European
countries and some southeast European countries have achieved high
rates of growth in transition. Their successes have hinged mainly on
market liberalisation, boosting competitive advantages and creating
business friendly environments.
How
can Kosovo do it? Despite Kosovo’s small size, sustainable economic
growth in Kosovo is unlikely to be driven by any one sector or
industry.
The
SME sector is currently the most vital, and it offers the greatest
potential for future development as the business environment
improves. Agro-processing SMEs are already engaged in import
substitution and have begun exporting dairy products, meat and
beverages to neighbouring countries, with scope for expansion.
Construction material suppliers likewise have substantial scope for
expansion in a growing economy.
While
the potential for higher value added products and services is limited
now, this should change with educational and infrastructural
improvements in the long term, with particular opportunities in the
IT and financial sectors. Tourism, especially winter and ski tourism,
could benefit similarly.
In
the energy sector, plans are currently being
developed to meet increasing local demand and also external demand
due to the large, growing regional power shortage, by rehabilitating
Kosovo’s existing thermal power plant and building one or more
large new plants. The opportunity must be weighed carefully in
sustainable development terms, given Kosovo’s high population
density, water scarcity and pollution problems.
These
plans are necessarily long term and dependent upon foreign direct
investment (FDI). Given the high level of investment required –
some €1.7 billion for the power plant, mines, transmission systems
and related objects – and the technical complexity involved, the
first phase of such a development would extend over a period of at
least seven to eight years.
However,
within two to three years, construction and other work related to the
project would bring significant benefits in terms of employment. In
the longer term, both employment and exports would rise as Kosovo’s
businesses would benefit from reliable, low cost electricity.
Mining
is another potential growth sector, metals having once been one of
Kosovo’s primary export products.
The
recent privatisation of the Ferronikeli ore mining and metallurgical
complex will generate some 1,000 jobs and enable the resumption of
exports. There is also potential for the redevelopment of other mines
and smelters – lead, zinc, nickel and manganese – many of which
are currently idle, including Trepca mines.
However,
the potential scale and commercial viability of the resumption of
mining and smelting is unclear. Privatisation and substantial capital
investments from foreign investors are prerequisites for resumption
of work and commercial viability and, farther down the line,
regeneration of Kosovo’s suffering metal products sector.
Much
depends upon privatisation. Where the process has succeeded, business
success stories can be found. Excellent examples are Llamkos, a
producer of galvanized zinc sheets, and Ballkani, a producer of
rubber conveyor belts.
MAKING
IT HAPPEN
According
to the growth scenarios presented above, the factors that will
stimulate economic growth will be heavily dependent upon effective,
democratic institutions and the rule of law.
A
resolved political status for Kosovo will help create a better
investment environment, with normal access, for example, to
international financial institutions. Resolved status should also
catalyse fuller mobilisation of private and public, domestic and
international sources of investment.
Given
that the status of Kosovo is expected to be resolved this year and
that technical and financial assistance of the international
community will continue, these conditions can be achieved.
The
national economy will most likely depend upon the ability of
institutions, individuals and businesses to generate and absorb
investments, transforming them into feasible projects and sustainable
economic growth. This will provide the real-life basis for what must
be an aggressive remarketing of Kosovo as a credible destination for
FDI.
In
order to maximise absorption capacity, policymakers must learn to
deal more forthrightly with Kosovo’s economic realities. The
current policy environment is technically and theoretically adequate,
but it is not always well-suited to actual conditions on the ground.
Kosovo’s
tax regime in particular would benefit from further scrutiny. Lower
taxes on corporate profits, free customs duties for investment-bound
capital goods and extended VAT credits for equipment would go a long
way toward making Kosovo more investment-friendly.
Competition
also needs boosting across the board, most notably in sectors
dominated by public utilities and among lenders. In the latter case,
greater competition could help reduce the high price of credit, a
drag on long term investment.
The
challenges are admittedly huge. So must be the change in status and
governance, if Kosovo is to meet them.
Muhamet
Mustafa is co-founder and President of the Board of the Riinvest
Institute for Development Research in Pristina, Kosovo. Balkan
Insight is BIRN’s online publication.
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Comments:
unanswered question
Posted: 2007-07-27 14:36:00,
Mr Mustafa’s statement needs to be read to the end in order to find the most important fact on economic needs in Kosovo he has to offer: It is the finding that Kosovo needs at least a 7% annual growth in GDP to overcome unemployment, budget imbalances, and instability. At present and since the war, growth was on average a mere 1 ¾ %. (Letter by Prime Minister Bajram Kosumi and SRSG Sören Jessen-Petersen to the International Donor Community, 2 Nov 05). Indeed this is far too little. Especially when reminding ourselves that this growth has mainly gone into unproductive private consumption. Mr Mustafa is giving this highly important figure after some rhetoric about how successful Kosovo already is on its way, comparing it to Monaco, Hongkong, and others. However, it is better to stick with the facts, and these are bleak. The 7% growth figure is one of three “what if†scenarios for the future economic development in Kosovo. Mr Mustafa points out that there is a need to improve education, financial management, … and public infrastructure. After 5 years in Kosovo, I much agree, especially on the first item. My consistent experience was that the education level in Kosovo is dangerously low, be it with or without diploma. I expect that the lack of qualified professionals in public service, private sector management and technical mid-level will turn out to be the worst impediment to growth in Kosovo. The second big problem is that the PISG (notably not UNMIK, as this has been part of delegated powers for years) have failed to design and spell out a comprehensive economic development policy for Kosovo. Except, of course, the ever repeated mantra that “status†would solve just about everything. This is what everyone hopes, but no one can support it by verifiable statistical facts. What, exactly, makes Kosovo attractive to investors? Odds are that the opposite might happen: Many of Kosovo’s problems (poor education, poor infrastructure, insufficient rule of law, pre-industrial social structures, all verifiable through impartial reports and statistics) will be seen as “comparative disadvantages†of Kosovo. And there, economists like Mr Mustafa, should do more to help and draw the Kosovar politician’s and the public attention to the need to change this. A sound economic policy is most needed, because what people in Kosovo need most is a basis for a decent everyday life, whether Albanians, Serbs, or any other. Sound implementation of that policy by all administrative entities comes right next: The laws designed by the international community are not as bad as Mr Mustafa makes them look. What is bad is their understanding and implementation by the insufficiently trained local administration staff. Delegated powers, remember. As Mr Mustafa points out: It is the Kosovars themselves who have to make it happen. And this will cost more time, effort, austerity and sweat than most imagine till now. Mr Mustafa gives three scenarios and implies that significant growth can only be achieved by resolving status –say independence. Many believe this, as it is being repeated all the time. Mr Mustafa, however, does not lay open the economic figures and scientific assumptions that support this view. Yet exactly such scenarios for economic viability, with independence and otherwise, should be object of highest scrutiny by economists and policymakers. It is the title question of this article. Unfortunately, Mr Mustafa has not really answered it.
Kosovo is Independent
Posted: 2007-11-20 00:44:44,
Kosovo in december will be Independent please i am saying this europarliment please don't play with Kosovo now is time to decide and we decide the politic in Kosovo decide to be independent the people there want to be free forever!!! Thank you