Kosovo - the economic dilemma

by Katinka Barysch

Now that Kosovo’s independence party is over, the hard work begins. Despite the efforts of the UN and the EU, the institutions of government remain fragile, corruption is rife, and organised crime is a problem. Although growth has picked up, the economy remains in a woeful state. Kosovars like to blame poverty and joblessness on politics. Many hope that, now that the status question has finally been settled, money will start flowing in, creating growth and jobs.

This may be true as far as official assistance is concerned: as an independent country, Kosovo hopes to be able to borrow from the IMF, the World Bank and other financial institutions. More aid will also be forthcoming, since the international community cannot afford to see Kosovo fail. The European Commission and the World Bank are planning to convene a donors conference over the next couple of months. The Commission expects the Europeans to drum up €2 billion, and the Americans say they will contribute $400 million.

However, the Europeans are also aware of the risk of turning Kosovo into an aid-dependent protectorate. Since 1999, the EU and its member-states have already given €2.6 billion to Kosovo. A lot of that went into rebuilding houses and roads after the 1998-99 conflict. But it has failed to build a viable economy. Even today, perhaps 20 per cent of Kosovo’s GDP directly depend on foreign aid.

Kosovo’s economic problems are not only the result of the sanctions of the 1990s and the 1998-99 conflict: when it was still part of Yugoslavia, Kosovo already relied on big transfers from Belgrade, and unemployment was much higher than in other parts of the federation. But in the 1990s the economy basically collapsed. And despite signs of recovery in recent years, the challenges remain huge.

Official unemployment stands at around 40 per cent. And even if black market activities and subsistence agriculture are taken into account, there are more Kosovars on the dole than in a job. Unemployment is particularly high among those under 25, who make up half of Kosovo’s 2 million people. Around half a million Kosovars have left to work in the EU, many of them illegally.

Of those who stayed at home, more than a third live below the poverty line, and social services only reach a tiny share of them. There are no industries to speak off, and little to export apart from scrap metal. The current-account deficit amounts to 50 per cent of GDP (although that is inflated by the big international presence). Although the EU claims that it has invested €400 million into the power sector alone, regular electricity blackouts remain the biggest problem for local businesses.

The news is not all bad: GDP growth has picked up despite a gradual reduction in international aid; household incomes have been rising; tax revenue has started to recover, and privatisation has provided the budget with an independent source of cash; and almost all children now go to school, at least some of the time.

Some foreign companies have started to look at the mining and power sectors: Kosovo sits on Europe’s second largest deposits of brown coal, and it also has sizeable resources of lead, zinc and nickel. Building up these sectors for exports would reduce the external deficit and bring in foreign exchange. But since energy and mining are capital rather than labour intensive industries, they will not create many jobs. The resolution of status alone will not be enough to attract foreign investment into other manufacturing sectors and services. Kosovo will need a more open and transparent business environment, an efficient state administration and skilled workers. Despite the EU’s help and promise of eventual accession, such reforms will take years.

The World Bank says that even with 6 per cent annual growth (twice what Kosovo manages at the moment), it would take ten years to cut unemployment by half, from 40 to 20 per cent. Persistent unemployment, in particular among the young, will fuel frustration, which would be bad for political peace.

There are two things that the EU could do to help Kosovo’s economy now, apart from giving money and advice. Both will be controversial. First, it should help the farm sector, which is where most Kosovars work. It is hugely inefficient but has potential for quick improvements. With EU farm aid and better market access, Kosovo could start selling fruit, vegetables and meat abroad. Second, the EU should keep its labour markets open: one in five Kosovo households relies on remittances from abroad, and they probably contribute more to Kosovo’s economy than all foreign aid put together.

Katinka Barysch is deputy director of the Centre for European Reform.