Jakob Modéer's Balkan & Europe Blog

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 86^th in the world, up from 96^th in 2013 and 126^th 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 2^nd 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).

When I look out my window in Tirana, Albania, I look East towards the hills of park Dajtit, I can see seven trees. Seven, that’s it! It’s like the local population is allergic to greenery, every square meter has been turned into a apartment block, spontaneous parking lot or an area used for some kind of economic activity.

Today when the temperature is reaching far above 35, some more shadow would be nice. No such luck. Except for on Rruga Ismali Qemali where the grand maple trees create a tunnel of coolness, the trees of Tirana have been sacrificed on the alter of economic growth (read: greed) and we pay the price every day in sweat. No trees mean no coolness in the summer heat, no trees mean that dust rules the streets, blowing dirt into eyes and cloths. For certain, rules and regulations forbid the cutting down of trees, even in Albania, but like all other laws they are being ignored more or less deliberate by people. Why? How about this for a theory. After 50 years of suppression by the state, modern rules and regulations are seen as tools by the state to continue to suppress the free will of the people. Rules and regulations are not accepted as guidelines to be followed in order for society to function properly, for the good of the majority, and as a result people spend all their time breaking the rules – cutting queues, driving against red, not declaring income, not using cash machines to record a sale, looking for a short cut to richness, throwing litter everywhere (even inside the elevator, why?) Rules are for others, rules are for the stupid!

Until the day when the majority of the people realize that the rules and regulations are there for their benefit and protection (to live longer and well as a life ambition, what a thought?), the rules/regulations will never be obeyed, and as a consequence chaos, dirt and heat will continue to rule Tirana. Poor trees, poor people.

If you stand around a traffic intersection in Tirana, Albania, 5 minutes is all you need to put the finger on the country’s key problem. There is simply no respect. No respect for formal rules. No respect for other people.

In Tirana, a red light means “slow-down” to the driver while it means “cross-if-you-dare” to the pedestrians. Young children learn from their parents and grandparents the art of jay-walking, passing a four-lane street without being killed, rather than waiting 35 seconds for a green light.

For a large SUV, the same red light means “speed up”. The fact that some pedestrians may be half way across the street means nothing to the driver of the 2 tonne monster machine. He does not respect them anyway. If by chance a policeman makes the effort to stop the road killer, the driver is most likely to give him a verbal beating. The policeman will join the driver in the dog-fight, shouting back and waving hysterically with a green and red ping pong racket. After a short exchange of offensive language, the jeep rushes off. He does not respect the policy force anyway. As the driver of a big car, he is above the law. The message to younger generations is clear – you want to be respected, make sure your dad buys you a big, f-kn car!

From this anecdotal evidence, a serious question arise. If you do not respect basic and universally applied traffic rules, can you respect the more sophisticated rules of democracy, or even legislation? Probably not. In societies where there is no respect for authority, rules or altruistic values, some people will always feel that their “bigness” puts them above the law, and ahead of the rest of the population. This is the law of the jungle, not the foundation of civilized behavior, and our collective behavior is our political culture, upon which political institutions are built and maintained…see it all starts at the local road crossing!

An academic take on Kosovo 2011
In the conclusion to his speech at Riinvest 15 year anniversary in 2010, the American Ambassador Dell sent a warning to the citizens of Kosovo, with special emphasis on the political élite, remarking that the “(c)hoices and decisions made today will determine whether the Kosovo of 2020 looks pretty much like it does today, the poorest country in Europe, with huge unemployment and an uncertain future, especially for its young people, struggling to survive as a viable, independent state.”
While the citizens of Kosovo now enjoy basic needs, essential household commodities and relatively peaceful existence, much remains to be done to further enhance the quality of life and seize opportunities. In one way, the young state of Kosovo could be described as “inefficient but restrictive.” The state has taken on an interventionist role, not un-common in post-war societies, “which involves the state in planning and organizing production and development”. In Kosovo, the state clings on to a dominant role in the economy, i.e. mining, energy generation and telecommunication sectors as well as in Society.
Such a restrictive state prevents people “from following their own best interests via the market”. At the moment, the public sector in Kosovo employs 100.000 people, one third of total employment. Ambassador Dell is the first to admit that this figure is unsustainable and a “clear sign that the Government has assumed a dangerously large position in the economy”.
Corruption is now chronic in public administration, as a result of crony recruitment habits, low salaries and low motivation among civil servants. The public sphere in Kosovo is under tremendous pressure from “clubs of the powerful” pursuing their own interests. For Mackintosh such collective “manipulation of the public environment constitutes public action, whether this is through legislation, lobbying, self-organization or rigging the market.” However, whichever form the public action takes, it does not adequately correspond to the current public interest, leaving the citizens of Kosovo disillusioned with their new state, the economy in dire straits and the civil society without enough social capital to become a viable generator of change.

Democracy
The political landscape in Kosovo is neither authoritarian, as in Yugoslav times, nor does it fulfill Dahl’s definition of liberal democracy. Rather, it can be described as a partial democracy, where “elections are held, but organized to ensure that only certain candidates can be elected.” International observers to Kosovo General Elections in December 2010 reported that “cheating was so blatant that no attempt had been made to cover it up…(I)n one district with 940 registered voters, another 300 had apparently “voted”.
The EU’s 2009 Progress Report on Kosovo makes for additional critical reading, highlighting an economy suffering from very high unemployment rates, limited export earnings, and an overwhelming dependence on remittances from the Diaspora. In fact, “the level of economic activity does not allow the young and growing labour force to be absorbed. For many, emigrating and working abroad remains the only viable option to support their families in Kosovo. Labour is indeed Kosovo’s biggest (non-recorded) export item…”
According to the World Bank’s “Doing Business Index” 2009, which measures business regulations, Kosovo is actually slipping in the ranking, from 156th to 164th place, losing ground in 9 out of 10 dimensions. In line with the private interest theorists, excessive regulation, licensing and permits for economic activities lead to “rent seeking”, opening the door for corrupt practices, as “regulators and their clients develop patterns of mutual accommodation which run against the public interest.”
Unlike in Argentina 20 years ago, where the disillusionment with the state was caused by economic policy failures, inflation and high unemployment, in Kosovo the disillusionment is caused by the state’s inability to serve the public interest and fight corruption and improve the living standards of the population. Difficult times in Argentina saw the surfacing of social movements, like the Global Exchange Network, fulfilling the population’s needs where the state and private sector were failing. There is no such trend within civil society in Kosovo today, due to low levels of social capital and a traditional reliance on either family or state (Yugoslav experience) to serve their private needs.
That said, Kosovo is a post-conflict country, and as such it has to tackle social and economic trauma at the same time as constructing a new state from scratch. In the words of Ambassador Dell, “(f)or the past ten years, you and your international partners have concentrated on establishing Kosovo’s nascent institutions of state. This was the right choice…Kosovo today has a liberal governing structure that can support an open economy…there is a modern legal framework in place…This monumental effort is now largely completed…” With the World Bank’s definition of ‘good governance’ in mind – “the means in which power is exercised in the management of a country’s economic and social resources for development”, it is however difficult to come to the same optimistic conclusion about the situation in Kosovo, and the development efforts of the past ten years. On the opposite, the Kosovo state institutions are under-performing on all four areas of governance – Public sector administration, accountability, legal framework for development as well as information and transparency. Furthermore, there is a common view held among citizens in Kosovo “that bureaucrats exploit their monopoly of information and services: in order to expand their budgets, powers and perks”. The new Government, in place since March 2011, was even expanded with a new Ministry for Economic Development, which will require additional funds from the Ministry of Finance. A growing Government and public sector in Kosovo feed nicely into the views held by the private interest theorists that governments “can go wrong” and “that the state tends to grow into a monster”, as in the ‘Leviathan’ state.

Protectorate Kosovo
During the first ten years following the end of the conflict, Kosovo has experienced an enormous influx of international development agents, pursuing an intentional development path. The state of Kosovo and its international supporters have made deliberate efforts to achieve progress and improvements in the political, social, economic life of Kosovo citizens. Through a ‘trusteeship’ relationship, international donor agencies are ‘entrusted’ by the Kosovo state to support and ensure the ‘development’ of Kosovo. However, none of the features required by states to successfully implement intentional development, according to Johnson, White and Wade, are currently in place in Kosovo.
There is no leadership in place, which is “ruthlessly committed to national economic development (and not to partial interests or its own enrichment)”. Neither has a developmental élite emerged, nor a strong bureaucracy. Rather, the bureaucracy in Kosovo remains weak, over-populated and closely linked to the political parties in power. Finally, there is no “availability of possibilities for strategic intervention to govern the market”. The main reason for that is that there is not much of a market to govern, in order to achieve public policy objectives, such as job creation. In fact, the only feature in place in Kosovo in support of a “developmental state” is a weak civil society.
To what extent progress has been achieved is questionable, but certainly Kosovo has not yet reached a level of sustainable immanent development, despite billions of euros in financial support and technical assistance by international development agencies. In fact, there are few or no signs of development occurring in Kosovo as a result of a “spontaneous and unconscious (‘natural”?) process of development from within.” In order for this to occur, there need to be a vibrant private sector and a civil society free of political interference. Neither exists in Kosovo today. Rather, an intrusive bureaucracy, a weak judiciary and un-fair competition from crony and grey market capitalists are suffocating the dynamic development aspects of entrepreneurship.
The same can be said for civil society and media that are still trying to create space for themselves beside a state with monopolistic tendencies. “(T)he news media can play a vital ‘adversarial” function in putting the government under constant pressure to be responsive and sympathetic to the plight of the common people”. There is an obvious parallel here between Sen’s arguments about famine and non-democratic governments, and the relationship between the government and a failing economy in Kosovo. As long as economic policy failures “are relatively costless for the government, with no threat to its survival or credibility, effective actions…do not have the urgency to make them inescapable imperatives for the government.”
In Kosovo today, the roles of the state in development cannot be separated from the development agencies’ roles. This is a result of 11 years of immense international involvement in every aspect of the public sphere in Kosovo. In a jungle of development agencies, and without a National Development Plan to coordinate their efforts, and international disagreement on the unilateral declaration of independence by Kosovo authorities, it is understandable that conditionality did not end up high on the development agenda. However, this limited conditionality may also have contributed to the lack of improvements in economic policies and generally slow economic development in Kosovo.
Another apparent reason for poor performance by the Kosovo state is an all-embracing lack of ownership for policy, and for the implementation of policy reform programmes in particular. Too often, calls for change are generated by the development agencies, rather than the Kosovo government, private sector or civil society. Without the support of “local champions and domestic leadership” changes and reform programmes are not sustainable. Poverty reduction requires the “institutionalization of altruism”, which in turn requires “another kind of agency. Not an organization, which promotes what it views as development…but agency in the general social sense. Individuals and groups must have expectations and make demands in order for the structures to be challenged”.
By increasing “participation” of private enterprises and civil society in development, a process of empowering them will occur. In turn, this may lead to a “power over” situation, where the power of the state in the intervention process is decreased to the benefit of other stakeholders. In one way, the state and the international agencies have until now pursued a policy of “unaimed opulence”, lacking in “participatory growth” and unable to spread the fruits of economic injections across the population in Kosovo.
The future for Kosovo
While the people of Kosovo are far from starving, contributions of international development agents today make up one third of GDP and remittance from Kosovo Diaspora makes up another 30%. Should any of these two channels of funding dry up, the economic collapse of Kosovo is a distinct possibility, which in turn would throw an even large proportion of the population into relative poverty. Of more concern is Ambassador Dell’s faintly disguised criticism of the habits of the current political elite in Kosovo, their resistance to change and basic instinct to hold onto power, at any cost. Robert Chambers puts the finger on the core issue applicable to the political elite of Kosovo, when he proclaims that the biggest challenge of the 21st Century is to “find better ways to enable those who are powerful to gain more satisfaction from exercising less power”. In other words, instead of filling their own pockets, the political leadership in more autocratic societies must enhance a process where political power is divided between different institutions (checks and balances), and rotate regularly between various actors (democratic elections), where wealth is distributed more evenly within their societies and perhaps even transfer power to a new ‘post-independence struggle’ generation of political leaders.
The public upheaval and toppling of old, static and un-democratic regimes in the Arab world in the winter of 2011, only confirms the difficulty in maintaining a regime for the benefit of the few, in countries with a large unemployed youth population. At this point in time, Kosovo urgently needs to identify and support individuals equipped with a new kind of individualist motivation, “a drive for achievement, which will not only aim at personal gain but also convert this gain into productive investment, which may eventually benefit society generally.”
To change course, and avoid social, economic and political failure, Kosovo must make radical changes in its approach to development and public action. A better functioning democratic political system and free press will no doubt contribute to correcting failures, but public activism against corruption and for economic development is also required. “Ultimately, the effectiveness of public action depends not only on legislation, but also on the force and vigour of democratic practice”. Social, economic and political improvements will only occur if the state, civil society and private sector collaborate.
In order for development to be successful in reaching its goals, the Government and public administration must ”enjoy the trust and co-operation of the whole of society”, and not be “isolated and out of touch”. Using the terminology of Alan Thomas, Kosovo and its supportive international development agents must move from “intentional” to “immanent” development, by “empowering” the country’s young population and unleash the power of private entrepreneurship to reach levels of real “progress” in living standards and economic growth.
State action “can be particularly crucial in regenerating lost incomes”, as in post-conflict Kosovo, but these actions must not stifle ‘trade, commerce, scientific research, the news media, political parties, and other instruments of economic, social and political actions.” Again, using the arguments of Sen, high unemployment and relative poverty in Kosovo, can best be tackled through economic expansion, which also “reduces the need for entitlement protection”. The same way “the major feature of the problems of Sub-Saharan Africa is not the particular lack of growth of food outputs as such, but the general lack of economic growth altogether”, Kosovo lacks neither resources nor potential outputs, but suffers from low levels of competitiveness and economic growth. There is a need for more “diversified production structure”, reduced over-dependence on old state monopolies and development of new sources of income and growth in Kosovo.
In Kosovo today, the private interest view of the state has a case. “Although the pursuit of private interests allocated resources efficiently in competitive markets, this generally does not occur when governments use monopolistic powers of government to their own advantage. Politicians, bureaucrats and many private interests gain from a growing government and greater government expenditure”. There is a situation of ‘government failure’ in Kosovo, with a rapidly expanding public sector that is not in tune with public interest. Along the lines of the neo-liberal theorists, the state of Kosovo has become too large relative to the private sector. To stop the descend towards a Leviathan state, there is an urgent need in Kosovo to shrink the state. However, like in Third World countries, there are few state activities to be cut and few services to be contracted out in Kosovo. The focus should rather be, as Ambassador Dell highlights, on selling off state owned monopolies, and reduce the inflated public administration. However, these measures will only go part of the way in aligning public actions with the public interest in Kosovo.
In order to adequately address the high unemployment rates and relative poverty, there is a pressing need to promote and support the private sector in Kosovo to become the core source of employment, as it is in other more developed countries. As a further step, “foreign investment can come, but only if business conditions improve and Kosovo’s reputation as a solid, law-abiding nation is strengthened”, in the words of Ambassador Dell. Having initially chosen “development alongside capitalism”, as the preferred view of development, the state of Kosovo and development agencies, will now probably have to re-focus and assume a more “neoliberal approach”, as a means of kick-starting the economy, and a “people-centered approach” in order to increase civil society’s participation in “public actions on development”.

Conclusion
In a development perspective, the state and economy of Kosovo are terribly under-performing. The modeling of the post-conflict Kosovo state has been based on the idea of the public interest state. A political elite, with its civil servants, supported by international development agencies “define the public interest”, and “use the economic powers of the state”, and the development agencies, to serve the public interest. To this end, the public sector remained a substantial force in the economy. However, it has become increasingly obvious that the state has not been successful, neither in identifying the ‘public interest’, nor servicing it.
As in many other post-war countries, the predominant development theory in Kosovo assigned an array of roles to the infant state, and the same time was overly optimistic about “the state’s benevolence and competence”. Taken to the extreme, the sustainability of Kosovo, as a state, now depends on its ability to deepen “participation and partnership”, both internationally with other states, multinational corporations and development agencies, but more importantly on its capacity to strengthen the level of ownership among stakeholders in the state, private sector, civil society and minority groups for public actions, policy and programmes aimed at serving the public interest.

The other day I was staying overnight at hotel Afa in Prishtina, Kosovo. In the morning I enjoyed an elaborate breakfast in the hotel’s new wing. There was everything from corn flakes to ham and eggs on offer, freshly baked bread and cappuccino. There must have been at least 50 persons in the breakfast room that morning. At the table next to me two Italians were discussing their “work plan”, the Germans were focusing in on their “target groups” and the Swedes were set to ’empower” a group of local women agricultural producers. What was striking was the complete lack of businessmen, there was no business talk, no talk of cost-cutting, price reduction and quality improvements. In Prishtina, that very morning, there was probably another 200 consultants staying at other hotels, getting ready to go to work in support of the Government, ministries, agencies and public administration. Add to them another 300 who are on long-term contracts and rent apartments, and you have a formidable force of human resource capacity, enough to keep the new state of Kosovo running. No wonder the locals feel limited ownership and responsibility for their own affairs. Why should they, the foreigners are there doing their job! For 10 years now! The other day, the EU announced they will spend another 65 million euro in assistance to Kosovo. Is this a positive sign or a confirmation that without external financing and human resource the Kosovo state will not be able to service its citizens? There was a time when the Government of Estonia asked the UNDP to leave the country because its presence in Tallinn was placing Estonia, a country in rapid transition and with big ambitions for Foreign Direct Investment, in the same category as countries in Sub-Saharan Africa. Before Kosovo goes the way of many Banana-Republics before them, eroding their own competitiveness by relying too heavily on remittances and donor support, its is time for Kosovo to make full use of its only real asset, its young population. But this will require massive investment in education, driven by the needs of economic sectors with export potential. At the moment, why should a Kosovo youth take the risk and costs of starting up a company, when s/he can go work as a driver on a donor project making €500 per month? Or why work at all if relatives abroad are sending money regularly, enough to drink coffee all day and pay my mobile phone bill? Well, the problem is that one day the donors will grow tired of carrying Kosovo forward (hopefully in that direction) and the Diaspora will send back less money as they get increasingly integrated in the new home countries. With falling income and lack of human resource, an economy that cannot pay for its imports, the state and public administration in Kosovo will find it increasingly difficult to function. What to do? Simple. Kick out most of the international consultants. Let the Kosovo authorities take the wheel of their own destiny, let them make the mistakes themselves and learn from them, rather than blaming the foreigners. Stop putting the carriage before the horse, and start building a viable economy in Kosovo. Stop spoiling the young generation and equip them with skills to fulfill job obligations in companies that are active on the world market, not in the aquarium market of Kosovo, at salary levels which are comparable to other countries in the region. That done, we can start to think about foreign direct investment. At today’s salary levels, who would set up shop in Kosovo? Time for a re-think among all Western donor countries.