Economic Viability of an Independent Kosovo

2020 words

Economic Viability of an Independent Kosovo

Henry H. Perritt, Jr.

Introduction

The Allegation

An independent Kosovo would be economically isolated from Serbia and would not have any chance of surviving economically, so it would soon turn into a place of social riots and blood feuds among Albanians themselves. (Serbia and Montenegro Foreign Minister Vuk Drasković interviewed by Beta News Agency). [1]

That state could live only from smuggling drugs, people and weapons. (President Boris Tadić in an interview to Radio Free Europe/Radio Liberty).[2]

Doubts over the capacity of Kosova to survive economically are often voiced in the most negative terms, building on the real difficulties that the local post-socialist and post-war economy faces. The argument is that Kosova would never be able to survive because of isolation and cultural backwardness.

The Answer

I was in Kosovo the first time in December, 1968, when the Serbs were still in charge, and back just after the Serbs had left and about twenty times since then. When the Serbs were in charge, all of Kosovo was a depressing trash heap. No one had washed a window in Pristina in years, garbage and stray dogs were all over the place, I could not send a fax or get money changed. The hotel had doors hanging off their hinges and stopped up toilets. The food was vile, and the waiters surly. About the only activities that seemed prosperous were the army and the police who stopped us at almost every traffic intersection and rudely pointed automatic weapons at us and pawed through our luggage. Within weeks after the war, the Kosovars had cleaned up Prishtina, washed the windows, bought portable generators and set up shop. Everyone welcomed visitors with smiles and enthusiasm. Small businesses had burst out all over like flowers in spring.

Before the NATO intervention, Kosovo was well on the way to ruin, corruption, and decay, a backwater of Socialist failure. After the Serbs withdrew, underlying pride and entrepreneurial spirit began to build a market economy, and have continued ever since then to strengthen it. There is a long way to go, but it is clear that much is possible when ordinary people are freed to build a country with cheerfulness and pride, rather than being prisoners of sour, backward looking, defensive, isolation, which exalts racism and ethnic hatred as a way to get ahead in politics--characteristics which were hallmarks of the Milosevic regime in Kosovo.

Kosovo is a landlocked territory about half the size of Vermont. It has two million people, most of them ethnic Albanians. The scene of periodic conflict between its Albanian majority and Ottoman and then Serb governments for more than a century, it mounted a successful insurgency against Slobodan Milosevic’s regime in the mid 1990s, spent seven years under international civil administration and is widely expected to become an independent state in late 2006 or 2007. It is well along the road to democratization and the establishment of a rule of law, working hard to ensure security and equal opportunities for its significant minority populations of Serbs, Roma, Bosniaks and Turks. Economic progress has been mixed, with significant improvements in infrastructure accompanied by high levels of unemployment and insufficient foreign investment.

Opportunities for business, investment, and job-creation abound. This essay develops the argument that Kosovo not only is viable economically, but has a bright economic future if foreign investors recognize its potential and if its future political leadership, encouraged by the international community, pursues business-friendly policies and regional economic integration.

Infrastructure

Kosovo’s infrastructure for business is acceptable, though much remains to be done in the electric power sector to assure reliable electricity supplies.

Kosovo’s Internet connectivity is among the best in the world. It has a nationwide broadband wireless backbone, which allows businesses and individuals to obtain high-speed Internet connections at prices at or below those available in Western Europe and the United States. The connections are reliable. Internet cafes abound in the cities, making it easy for individuals, including those of modest means, to maintain regular access to email and Web pages. High quality education and training on information technology is available from IPKO Institute and the American University in Kosovo.

Most Kosovars rely on cellphones rather than landline telephones. The fixed telephone system has been upgraded since the war and is reliable. Cellphone service is available from competing providers at prices competitive with those available elsewhere in Europe. The service provided by the public PTK has been unrealiable in the past, although it is usually possible to complete calls after several tries, even when congestion is a problem.

The airport in Prishtina is modern and served by several major airlines with daily flights to hubs throughout Europe and Turkey.

Major road construction projects sponsored by the European Union have left Kosovo with a good highway backbone of mostly two-lane paved roads. Rural roads are less satisfactory, many of them unpaved and poorly maintained. Plans are well developed for a new high-capacity highway between Prishtina and the Albanian port of Durres. The government of the Republic of Albania has agreed to invest substantial capital in the portion through the mountains of Albania, and the United States Government has promised support. The government of Kosovo needs to overcome EU objections and begin construction on the portion through Kosovo, which also would relieve congestion on the Pristina-Prizren road.

A well-organized and inexpensive system of intercity buses allows the population without automobiles to move about freely all over Kosovo. Kosovo has a basic railroad network, but it is poorly maintained and little used for freight.

The biggest infrastructure problem is an unreliable electricity supply. As noted elsewhere in this essay, Kosovo has the largest lignite (soft coal) reserves in southern Europe, so it could be an exporter of electricity. But dilapidated power generating facilities located near lignite mines in the outskirts of Prishtina were not replaced as they should have been after the war because of various bureaucratic impediments in funding for rehabilitation from the European Union. Plans were developed by USAID for a complete rebuilding of the electricity generating complex and associated coal mines but have not been implemented. Plans also exist to tie Kosovo’s electric grid in Albania, which would connect Kosovo to the European grid with sufficient capacity to allow Kosovo to export electricity throughout Europe.

Until these plans are implemented, rolling power outages even in the major cities will remain common. Most small businesses and many larger facilities have standby generators to assure uninterrupted power supplies.

Labor markets

Kosovo has an ample supply of labor, due to its rapidly growing youth population. A significant fraction of those under 35 have spent time in Europe or the United States, working, getting university degrees and learning English. The primary and secondary school system in Kosovo does a good job of inculcating basic skills. The public university is very weak and has so far resisted efforts at dramatic reform. The gap is being filled by a large collection of private institutions, the best of which is the American University in Kosovo, which enrolls about 100 new students annually in degree programs in business administration and information technology. All instruction is in English. No “brain drain” is evident. Most young Kosovars who have worked or been educated abroad are eager to come home to participate in building a prosperous, democratic independent Kosovo.

Young people are resourceful and enthusiastic, especially in their contacts with Americans. Those who have work experience with international organizations have a good work ethnic. Some others respond well to good management that emphasizes the importance of meeting deadlines, focusing on achieving results, and being on time for appointments.

Wage levels are higher than one might expect, given the oversupply of labor, because international employers bid up wage levels. As the international presence declines, wage levels should soften.

Entrepreneurship

One of the hallmarks of Kosovar society is the strong orientation toward entrepreneurship. Largely excluded from the formal economic system during 10-years of repression by the Milosevic regime, Kosovars learned to survive by setting up business ventures with little capital and access to infrastructure. Informal business networks exist throughout the region, into northern Europe and North America. Almost every family is in some kind of business, concentrating more on service and retail trade rather than manufacturing and processing.

This pool of entrepreneurs offers significant opportunity to those who have the capacity to tie entrepreneurship to sources of adequate capital and modern business methods.

Capital markets

Kosovo has a good banking system. Internal savings rates are high, and Kosovars proved more willing than many expected to deposit their savings in the array of well-run banks established after the war. The major banking enterprises are tied to banking concerns in Western Europe, and use best practices in terms of internal auditing and conservative loan policies.

A significant source of capital in the past has been “remittances” from Kosovars working abroad. For decades, it has been the custom for at least one younger member of extended families to go abroad to find work and to send money home. While much of this money is consumed meeting the daily needs of family members still in Kosovo, it adds to the overall capital stock. Whether the stream of remittances will remain as high in the future as in the past is uncertain, as Kosovo attracts more of its young people to return and as host countries tighten immigration policies.

Many wealthy individuals with family, social or past-business ties to the Balkans have made significant investments in medium-sized enterprises and building and highway construction. Multinational corporations and individuals lacking any previous connection with Kosovo have expressed interest, but have been more reticent, mostly because of uncertainty about the legal status of Kosovo. Conclusion of final status negotiations should remove these barriers.

Privatization of “socially owned” and “publicly owned” enterprises has been controversial, but largely successful. The 14th round of public bidding was launched on 16 March 2006. The privatization agency, Kosovo Trust Agency, recovered well from a year-long hiatus in 2003-2004 due to maladministration by a senior European official who was sent to supervise privatization. Recent rounds of bidding typically have offered 10-12 enterprises in each round, have attracted more than 100 bids in each round, the highest of which typically totaled on the order of €12-15 million per round. A special court has been set up to adjudicate claims arising from privatization and the court is functioning.

Business services

Accounting and auditing services are available and professional. A public agency sets accounting standards and licenses accounting professionals. Legal services are improving as well-designed reform of bar associations and lawyer licensing implemented after the war add more better-educated and more professional lawyers to the practicing bar. There still is an acute shortage of well-qualified business lawyers, however, knowledgeable about the new legal framework and oriented toward market transactions. The provides opportunities for U.S. and European law firms.

The Chamber of Commerce of Kosovo and the Kosovo-American Chamber of Commerce both are under new leadership, which is western-educated, and energetic in communicating with potential investors about opportunities in Kosovo, providing services to businesses operating in Kosovo and in helping business interests be well represented before governmental institutions.

Regional economic integration

Kosovo’s economic prospects are brighter if it continues on its path of integrating its economy with others in the region. Already, substantial financial and trade ties with Slovenia and Croatia augment capital and open up markets for products and services from Kosovo. The large ethnic Albanian populations in the Republic of Albania, Macedonia, Serbia and Montenegro make available informal channels for investment and trade. These will strengthen naturally. Present and past governments have had good leadership in developing ties with European policymakers in charge of EU enlargement and it is important that momentum in this direction continue.

Comparative advantage

Kosovo has some of the largest lignite (brown coal) reserves in Europe. Lignite accounts for approximately 50% of total coal consumption in Europe, usually exported in the form of electricity rather than being shipped for long distances. The primary opportunity for substantial capital investment that would produce significant export revenue for Kosovo is in the energy sector, given the need to build new mine and electric generating capacity to take advantage of these reserves.

Kosovo still is a predominantly agricultural economy, with most agricultural production taking place on small family-owned, or village-run subsistence farms. Substantial reform in the methods of farming would be necessary for Kosovo to become a significant exporter—or even to be self-sufficient—in raw agricultural products. Agricultural processing, on the other hand, is a significant investment opportunity. Already wine production, soft-drink and beer processing and bottling, and dairy-product processing have attracted significant foreign investment.

Tourism is a largely untapped opportunity for Kosovo. Its geography is beautiful, varied, and largely unspoiled. A state-of-the art ski resort operates in southern Kosovo. Hotels and restaurants in the cities are of high quality. Those features, combined with Kosovo’s history and prominence in the news, present the possibility for attracting a significant number of foreign tourists. Investment in tourism is attractive because of large job-creation potential, relatively low capital costs and the opportunity to earn significant foreign exchange.

Kosovo’s good Internet infrastructure, the large number of young professionals with good information-technology skills and the now widely recognized potential of e-commerce to allow small enterprises access to world markets represents another largely-untapped opportunity. Most Kosovar businesses and non-profits of any size have web pages, but little has been done so far to establish e-commerce and other forms of Internet intermediation and software services in Kosovo.

Law

Kosovo has made good progress in establishing a rule of law—in the economic sphere as well as in the political and human-rights spheres. The main legal obstacle to economic development has been uncertainty about Kosovo’s final status, and independence will resolve that.

Kosovo’s legal climate for business is sound. Laws for business organization, corporate governance and investor protection, for resolving business claims, and for bankruptcy reflect best practices in Europe and the United States. The court system still is slow and unreliable, but commercial arbitration is widely used as a substitute.