Chasing development ‘indicators’, not ‘end results’

Last month, the World Bank Group’s report Doing Business recognized that Kosovo’s reform efforts are continuing to improve the investment climate. Kosovo now ranks 86th in the world, up from 96th in 2013 and 126th in 2012. Furthermore, Kosovo was recognized among the top 10 reformers worldwide. The captured reforms include introducing new procedures and systems to deal with starting a business, obtaining construction permits and registering property. 

The results are a recognition of Kosovo’s efforts made in recent years to address key bottlenecks in its business climate,” said Jan-Peter Olters, World Bank Country Manager in Kosovo. “With a continued focus on the reform agenda,” he added, “critical elements are in place to accelerate the rate of business registrations, formalize economic activities, foster the development of a sector of small and medium-sized businesses, and—ultimately—improve the situation on the labor market.”

Now, why all the fuss about the time in takes to register a company and business enabling environment reform in general? Well, the basic logic is that by releasing private companies from excessive burdens put on them by public institutions, the companies will use the otherwise wasted resources (time, energy, financial, human) on more productive activities.

In order words, rather than wasting time having staff standing around in queues in public administration offices in order to register this and that, pay taxes and tariffs, the companies would invest their resources in making their internal business operations more competitive.

Such a business environment, it is argued, would also be more conducive to Foreign Direct Investments (FDI). As a next step, an increase in FDI and in outputs by domestic companies will lead to overall economic growth. And economic growth, we all agree, is necessary to reduce the very high unemployment and poverty figures in Kosovo.

So, in case business reform is the key to economic growth, why is the Kosovo economy not growing faster than 4% per annum? Why is unemployment still a whooping 45% and 17% still live in extreme poverty?

Economic growth is not higher mainly because its driven by government investments (highway construction), private spending (Diaspora remittances) and one-off privatization (PTK, electric distribution system, etc), and not by a productive, exporting private sector.

At around €1.795, Kosovo has the lowest GDP per capita in the Central European Free Trade Agreement (CEFTA) region (at about 60% of Albania’s), and its trade balance and current account are one of the most unbalanced in the region. Kosovo’s imports account for around 60% of GDP, while its exports cover only around 6% of GDP. Kosovo’s trade deficit is the highest in CEFTA and continues to increase (€602 million in first quarter of 2013).

According to a recent survey by “Commitment of Diaspora to Economic Development” (DEED), the total remittances in 2012 was €457 million or 9.3% of GDP. 22.4% of Kosovo families receive remittances from the Diaspora. This financial injection could be a direct contributor to economic development and real growth, but data shows that the remittances are mainly spent on consumption, i.e. on imported goods. This means that the largest chunk of the ‘imported’ financial resources are ‘re-exported’ out of Kosovo.

Undoubtedly, to change the characteristics of the Kosovo economy away from trade and imports to manufacturing and exports, an environment that is supportive of private business will have a positive impact. But this environment, made up of laws, regulations and directives, is only as good as the local circumstances allow it to be. What is systematically desirable is not always culturally feasible!

That means that while a law might show what actions and behaviors are desirable, how this law is implemented in reality shows if the law is feasible to Kosovo citizens and institutions. It is only when the law is feasible and culturally accepted that real, sustainable change will occur.

Which may go a long way in explaining why real change is not happening in the socio-economic situation in Kosovo.

The time of registering a new company (desirably as short as possible) does not automatically transform into more, successful Start-up companies in Kosovo, capable of growing and employing more staff. In fact, very few new companies survive beyond the 2nd year of operations. The fact that relevant Kosovo institutions have adopted a new process for obtaining construction permits does not automatically mean that new buildings and infrastructure will be constructed according to higher, internationally compatible standards.  

So while we should all rejoice in Kosovo’s progress up the World Bank’s ‘Doing Business’ Index, we must also consider that we are really measuring the ‘means’ rather than the ‘ends’. Business reform is a tool, not an end result in itself. As Mr Olters correctly points out the reform agenda’s end goal is to “…improve the situation on the labor market.”

Furthermore, there are other internationally recognized indexes, going beyond the business reform measurements of the World Bank’s ‘Doing Business’ Index that would be useful for the Kosovo institutions to implement.

One of these indexes is the Global Competitiveness Index by the World Economic Forum. This measures 12 pillars upon which competitiveness is built and maintained: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market efficiency, technological readiness, market size, business sophistication, and innovation.

Another index not yet applied in Kosovo is the Global Entrepreneurship Monitor (GEM), which includes an annual assessment of the entrepreneurial activity, aspirations and attitudes of individuals in different countries. GEM explores the role of entrepreneurship in national economic growth, unveiling detailed national features and characteristics associated with entrepreneurial activity. The GEM has three main objectives, (1) to measure differences in the level of entrepreneurial activity between countries, (2) to uncover factors leading to appropriate levels of entrepreneurship, and (3) to suggest policies that may enhance the national level of entrepreneurial activity.

More importantly, to show real progress in the socio-economic situation, experienced by Kosovo citizens on a daily basis, the focus should be on measuring and reporting the actual end results, and not on measuring and reporting progress on the means to get there.

To achieve positive end results means to reduce unemployment and poverty levels as well as to increase social inclusion and social equalities in society (as measured in UNDP’s Human Development Report).

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About Jakob Modéer

22 years of corporate and international investor experience as well as private sector development project management, consultancy in private sector policy and business advisory services, and direct consultancy to companies in South East Europe (and now a blogger on socio-economic issues)
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