Kosovo is a lower-middle-income country which has experienced solid economic growth over the last decade. Kosovo is one of only four countries in Europe to experience growth in every year since the onset of the global financial crisis in 2008.
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VIENNA, May 27, 2015 ― Senior officials including deputy ministers of finance of six South East European countries* and senior representatives of the World Bank and the European Commission are meeting... Show More + today and tomorrow in Vienna to take stock of financial reporting progress and to launch a new program. The Road to Europe: Program of Accounting Reform and Institutional Strengthening (EU-REPARIS) will support participating countries’ efforts to modernize their financial reporting systems and align them with the EU acquis communautaire.“Restoring economic growth--and making that growth more inclusive by creating jobs and eliminating barriers to labor market participation--are the top priorities for the countries of the Western Balkans” said Ellen Goldstein, World Bank Country Director for South East Europe “Governments have a shared understanding that this requires a business environment conducive to investment. Transparent and accurate financial reporting is a pre-requisite for serious investors and improves access to credit for expansion and job creation.”The EU has developed over the years a comprehensive legislative framework to protect investors and ensure adequate levels of transparency in the market. Corporate financial reporting is one element of this framework, and a building block of a well-functioning market economy. Trust in financial information can especially improve access to finance for small- and medium-enterprises (SMEs).“As candidates or potential candidates for EU enlargement, the REPARIS countries have made significant progress in aligning their financial reporting frameworks with that of the EU.”said Henri Fortin, Head of the World Bank’s Centre for Financial Reporting Reform (CFRR). “The new program will help them complete this process with a focus on SMEs which represent more than 99 percent of businesses in the region. We look forward to supporting countries in developing their accountancy professions and creating regulatory systems conducive to SME growth,"EU-REPARIS is funded by the EU, managed by the CFFR, and implemented as part of the EU’s Western Balkans Enterprise Development and Innovation Facility (WB EDIF). It offers participating countries analysis and advice, learning and skill development, know-how and knowledge transfer, and technical assistance and institutional strengthening to help them effectively implement financial reporting reform.Morten Jung, Head of Unit, Western Balkans Regional Cooperation and Programmes, DG Neighbourhood and Enlargement Negotiations at the European Commission, offered participants his encouragement, “Your commitment to developing high quality corporate reporting systems contributes to ongoing closer association and economic integration with the EU, encourages private sector growth and SME development, and offers opportunities for investment and job creation.”* Albania, Bosnia and Herzegovina, Kosovo, the FYR Macedonia, Montenegro, and Serbia. Show Less -
Austerity versus growth. This has been—and still is—an intensely debated in Europe (and elsewhere). But, ultimately, with related decisions (to be) taken in dynamic and global contexts being far more ... Show More +complicated than economic models could handle, the austerity/growth debate seemed to have alluded to—ultimately deceptive—policy dilemmas for governments in search of appropriate responses to the respective fall-outs from the global financial and eurozone crises.This complexity is reflected in unclear correlations: neither have countries with high budgetary deficits escaped economic recessions in the post-2008 context more quickly than those that have paid more attention to the longer-term implications of Keynesian counter-cyclicality, nor have those with a more prudent fiscal policy stance slid even deeper into economic misery. This is as true for the countries in the eurozone as much as it is in the Western Balkans.Kosovo, of all places, has intuitively understood that the link between budgetary deficits and socio-economic development objectives is considerably more complicated than the simple austerity/growth dichotomy. And to the country’s credit, for the most part, it has conducted fiscal policies consistent with this understanding.Clearly, one important factor in this outcome has been the fact that Kosovo never had any real choice in this. Classical instruments of macroeconomic stimulation are unavailable to its policy-makers. As Kosovo has adopted the euro as its sole legal tender, the central bank is precluded from any attempt to boost growth by monetary or exchange rate policies. Similarly, the Minister of Finance (as he has just outlined in his address to you) is restrained—with very tight constitutional and legal ropes—from adopting an expansionary crisis response or from attempting a macro-economic “short cut” approach to development.In fact, it have been the election-inspired decisions to increase aggregate demand—by (i) introducing new social benefits to political prisoners and war veterans; (ii) increasing public sector salaries; and (iii) committing to new, large-scale investment projects in the transport sector—that are the root cause of the fiscal challenges faced by today’s government and are risking a pro-cyclical policy stance in years to come. There are very few countries with a similarly tight fiscal framework, and any attempt by the new government to define own policy priorities runs into binding legal and constitutional constraints. Not only is foreign financing limited to national development priorities—as reflected in the need to have every loan be ratified by a 2/3-majority in Parliament—but also does the Minister of Finance need to devise budgetary policies under the fiscal rule, limiting budgetary deficits (with only few exceptions) to 2 percent of GDP, and the obligation that a mid-year budget revision cannot increase the budgetary deficit beyond the one specified in the original budget.This has a direct impact on today’s policies. The unrealistically optimistic revenue projections contained in the 2015 budget largely inherited from the previous government (i) pose a serious policy dilemma between the objective of re-establishing budgetary credibility (especially on the revenue side) and maintaining the budget’s constitutionality and legality; and (ii) make even more burning the question of the government’s role in fostering socio-economic development in Kosovo.In this audience, it is—I am convinced—well understood that Kosovo’s economy, while having (i) recorded consistently solid growth rates over the last decade; (ii) maintained macro-fiscal stability (with average budget deficits of less than 2 per cent of GDP during 2008–14 and a stock of public debt of less than 11 per cent of GDP); and (iii) developed a healthy, liquid, and profitable banking sector, has not succeeded in generating economic perspectives for discouraged jobseekers and unemployed (especially difficult for women and youth).But it is not only the legal and constitutional constraints that prevent Kosovo from using expansionary fiscal policies as a macro-economic policy tool for stimulating aggregate demand and fuelling growth. Even if we assume that none of these restrictions existed, the structure of Kosovo’s economy is such that it would not work if attempted. In fact, the 25 per cent increase in public sector salaries—a miniature version of the Friedmanesque helicopter drop—has not resulted in a measureable acceleration of growth, largely because of Kosovo’s exceptionally narrow production base and, consequently, high rate of import dependency.That is, the Keynesian concept of an income multiplier, whereby any euro of additional income circulates within a (closed) economy to generate additional incomes for others along the way, is largely inapplicable in the present context, when the initial boost to aggregate demand immediately leaks out of the economy as most of the acquired goods and services have been imported. This is a help to the economic recovery of economies in, mainly, the European Union—but it is not Kosovo’s role… There are still enough challenges that, first, need to be addressed internally.The consistently very high current-account and trade deficits, which are the consequence of the import dependency, point to the principal underlying challenges for Kosovo’s policy-makers—viz., to implement a reform programme aimed at increasing domestic productivity, having key sectors of their economy catch up with know-how and standards prevailing closer to the technological frontiers elsewhere in Europe and the world, and allowing goods and services “made in Kosovo” to be competitive in domestic and foreign markets. And the only way to “import” the necessary know-how and knowledge is to be open to the outside world, open in terms of (i) supporting students, researchers, and professionals to benefit from foreign education and exposure; and (ii) attracting foreign direct investments of the scale, scope, and quality to trigger innovation and “endogenise” economic growth.At this point, the shape of main pillars of a comprehensive socio-economic development strategy starts to stand out against the myriad of needs and wants in a country, in which average per capita income is about 11 per cent of the corresponding figure for the EU as a whole. This means, to be able to catch up with the EU over the lifespan of a generation, growth rates in Kosovo need to be considerably—and consistently—higher than in the EU. The first implication is, of course, that any development strategy, growth plan, or economic model aimed at raising Kosovars’ living standards to levels prevailing elsewhere in the EU has to be much longer term in nature than any government’s term in office, and it needs to rest on the foundations of a core consensus among the various competing political groupings, irrespective of whether they are currently inside and out of government.That said, for a long-term growth strategy to be sustainable over several changes in government, it has to rest on an institutional foundation that accompanies resultant changes and buffers social tensions. Experience has shown that effective social policies need to assure the inclusiveness of benefits across the entire income distribution. The mining sector cannot be developed without a resettlement policy that will not leave affected households worse off; energy generation can only be secured if prices remain affordable and social and environmental challenges are addressed upfront; and privatizations need to ensure the safe transition into alternative employments of those employees whose skill set does not match the requirements of the new owners.Within this context, the principal pillars of a comprehensive, long-term growth strategy that is to (i) effect catch-up growth with Europe; (ii) increase productivity in key sectors of Kosovo’s economy; and (iii) generate ample, high-quality, and well-paying employment opportunities—as I see them—look as follows:First, education—and here with a particular focus on the quality of education. There is a solid body of empirical research that shows that it is the quality of education, not university degrees per se, that has powerful effects on an individual’s—and, in the aggregate—on a country’s growth and development potential. In the end, a country’s distribution of income tends to be correlated to, if not caused by, the distribution of skills.Second, the rule of law, investment climate, and effective government. For the private sector—domestic and foreign—to choose Kosovo as its preferred location of economic activity, it needs to have confidence—confidence in the future, in the rules of the game, including their enforcement, and the ability to project, with a sufficient degree of accuracy, costs and benefits from any economy activity. Can the private sector be enticed to invest? Do households see an economic perspective for themselves and their children? In this, Kosovo has the benefit that a serious policy agenda aimed at reinforcing the functioning of government and strengthening the investment climate will help to achieve the country’s two overarching policy goals, viz., to accelerate European integration and socio-economic development.And last but not least, infrastructure, especially in energy. This can be a very long discussion, but I’ll keep it short. Kosovo needs to upgrade its highly inefficient, polluting, and fragile energy generation capacities to (i) achieve energy security; (ii) ensure energy affordability; and (iii) minimise and manage the related environmental and social impacts. Contrary to the transport sector, current plans of energy-sector infrastructure investments rest on a public-private partnership. I will not hide the fact that the challenge of implementing a comprehensive, multi-pronged energy strategy in line with the EU’s environmental acquis communautaire has proven exceptionally complex, but recent developments allow for cautious optimism.Medium-term success in these three areas have the potential of transforming Kosovo’s economy and opening the doors for serious interest in the—largely stunted—manufacturing and industrial sectors. They all require a strong focus and across-the-aisle commitment on corresponding reforms to (i) strengthen the overarching legal framework and/or the implementation of relevant laws; (ii) reinforce responsible public institutions; and (iii) assure transparency, access, and inclusion.Conceptually, it does not seem impossible to design, devise, and implement a comprehensive, long-term growth strategy with which to improve the very difficult situation on the labour market tangibly: maintain a strong macro-fiscal and financial foundation, ensure a functioning market economy, import knowledge and know-how from abroad, encourage savings and investments, increase the quality of education, and overcome the most binding infrastructure bottlenecks in, especially, energy.As Prime Minister Mustafa can attest, political reality does not always help in the implementation of such a programme. So it is the vision and long-term time horizon, the ability to influence even the most sceptic audience, as well as courage and determination that I wish policy-makers and stakeholders for the time until Riinvest’s golden anniversary. Show Less -
Other countries in the Western Balkans have been similarly at risk, and not just from floods. Too little water in summer months has also had hefty consequences for other countries: the 2012 drought in... Show More + Albania reduced the country’s hydropower supply, exacerbating fiscal deficits to cover emergency power imports. Droughts and heat waves have resulted in severe agricultural production losses in FYR Macedonia in 2007-08 and 2011-12.Western Balkan countries are not well-prepared for such disasters, and scientists are warning us that climate change will only make matters worse. These countries need to think now about how to create more resilient societies going forward.With global warming of close to 1.5ᵒC above pre-industrial times already locked in, and a 40 percent chance to exceed 4ᵒC before 2100 if no further action is taken, the recent World Bank report, Turn Down the Heat: Confronting the New Climate Normal, finds that weather extremes considered as occurring every 100 years at most may soon become the “new normal”.The report delves into the climate prospects for the Western Balkans. Water extremes, both intense droughts in summer months and floods in winter and spring, are expected to intensify over the region, with repercussions on agriculture, energy, and population health and security. In a 4ᵒC warmer world, the Western Balkans would emerge as warming “hot spots”, with more frequent heat waves – spanning as much as 80 percent of summer months – and a 20 percent increase in the number of drought days. Added to that are concerns for water availability and human health, such as an estimated 20 percent increase in heat-related mortality. At the same time, winter and spring flood risks – including those on the scale of a 100-year flood – would increase along the Danube, Sava, and Tisa rivers due to more intense snow melt in spring and heavier rainfall in the winter months.An upcoming World Bank publication, Europe and Central Asia Flood and Earthquakes Risk Profile, shows that the potential economic damages and losses from 100-year type flooding in the Western Balkans are likely to fall between 3 percent and 20 percent of national income depending on the country. The study also shows that the risk of seismic events, and resulting economic damages and losses, in these countries is ever-present, if not increasing. More than half of Albania’s and FYR Macedonia’s national income would be subject to damage and loss from a severe earthquake—as those with long memories in FYR Macedonia can attest. As a response to these threats, the countries of the Western Balkans need to shift from a reactive approach to emergencies toward a more proactive and forward-looking approach to managing risk before disasters happen. The recent launch of the Serbian National Disaster Risk Management Program is an important step in this regard.Launched with initial funding from the European Union, United Nations Development Program, the Swiss State Secretariat for Economic Affairs, the Swiss Agency for Development Cooperation, the Austrian Urban Partnership Program, and the World Bank, this Program creates a common platform in Serbia for reducing and managing risks from various types of disasters. From floods to droughts to earthquakes, the Program provides an open and neutral space for coordination on disaster risk management across government agencies, sectors, and partners. Other countries in the Western Balkans, including Bosnia and Herzegovina, are taking initial steps towards building greater national resilience. Given the shared risks and close economic interconnections among countries, as well as common policy knowledge and capacity needs, regionally-coordinated approaches would enhance the effectiveness of disaster risk management in all Western Balkan countries. With the world watching and struggling to help as countries grapple with post-disaster relief and recovery in places as distant as Nepal and Haiti, smart ideas to develop some type of global disaster risk insurance are being discussed by the international community. In the meantime, some Western Balkans countries have already established a regional catastrophic risk insurance facility Europa Re. Owned by the Governments of Albania, FYR Macedonia, and Serbia, Europa Re provides insurance for residential properties, small enterprises, and agriculture against catastrophic events triggered by floods and earthquakes.Unfortunately, catastrophic risk insurance is not yet in high demand from households, business owners, and farms in the Western Balkans, meaning the next big disaster will once again produce devastating and uncompensated damages and losses for large numbers of citizens. The Governments of the Western Balkans might consider making catastrophic risk insurance mandatory — linked to property registration and transfer, for example. Countries like Turkey have done this, helping millions of households and small businesses to be protected from damage and loss when the next disaster strikes. It is important for Western Balkan countries to awaken to a changing climate and adapt to a world of more frequent and severe disasters. We at the World Bank stand ready to support your efforts to build more resilient societies. Show Less -
Against this backdrop, a new report, Water and Wastewater Services in the Danube Region: A State of the Sector, aims to provide a roadmap for how to stimulate action and improve services for the tens ... Show More +of millions of people living along the Danube River basin.The report analyzes the progress and challenges of 16 countries in delivering sustainable water and wastewater services to everyone, while meeting the European Union (EU) environmental acquis. By breaking down water services into the core components of context, organization, access, performance, and financing, the report seeks to encourage and inform a policy dialogue around sector challenges and across national borders, rather than provide a definitive set of policy recommendations.While significant overall improvements have been seen over the last 15 years, countries across the Danube region still show very different levels of progress in their ability to provide sustainable services for all their citizens. The level of progress generally reflects the level of economic development of a given country – with EU members, especially those that joined before 2007, benefitting from a generally stable policy environment and a steady stream of EU funding, while more recent members and candidate countries continue to struggle with public services gaps, especially among the most vulnerable, and underperforming utility service providers. Governments and water service providers can implement clear accountability and incentive mechanisms, improved financing strategies – including more targeted and poor-inclusive subsidies – and improved management practices. Broader water sector financing frameworks are also needed to overcome an estimated annual investment gap of more than €2 billion.In many countries, water service is generally continuous and the quality of the drinking water meets national standards. Despite overall improvements, however, the efficiency of utilities in most countries is below international standards.Increasing costs have driven increases in tariffs throughout the region to the point where services might become unaffordable for low-income customers in some countries – yet the region is far from implementing the EU’s cost recovery principle.Despite these challenges, however, there are also real opportunities. The report suggests that countries look closely at the local context to best understand and overcome the challenges that undermine the ability of these institutions to deliver. History has shown that the water and wastewater sector is open to change – and if governments base their efforts on solid analysis, they can continue to build a positive momentum for the sector.EU integration does pose a challenge – but it is also a tremendous policy and financing opportunity for many countries.Finally, the sector can count on a strong technical workforce which, together with reforms at managerial levels and in terms of accountability mechanisms, has great potential to move the sector forward and secure access to high performing water services for all the people in the Danube region. Show Less -
22.5 million people without piped water and 28 million without flush toiletsVIENNA, May 6, 2015—Many countries in the Danube River basin face a double challenge of meeting the high standards of the Eu... Show More +ropean environmental acquis while extending sustainable water services to all citizens, with 22.5 million people lacking access to piped water and 28 million without flush toilets, according to the World Bank’s new Water and Wastewater Services in the Danube Region – A State of the Sector report, released today in Vienna.The report, which analyzes water services access, affordability, quality, and financing, comes ahead of the “2015 Danube Water Conference” to be held in Vienna, May 7-8, in which government ministries, regulatory agencies, utility companies, professional associations, and local governments will contemplate the future of water services in the Danube region.The Danube River basin is the second-largest river basin in Europe, home to a total of 81 million people in 19 countries, a majority of them EU members. The Danube connects with 27 large and over 300 small tributaries from its spring in the Black Forest in Germany to the Black Sea in Romania, and, as such, is the largest water basin in the EU.According to the report, despite improvements in the last 15 years, countries across the Danube region still show very different levels of progress in providing sustainable services for all their citizens. Many long-standing EU members have benefited from a generally stable policy environment and a steady stream of EU funding. Access, in particular, to wastewater services has increased, the performance of their utility companies is at par with international standards, and the financing of their services is sound.In contrast, more recent EU members, candidate countries and non-EU countries of the Danube region continue to suffer from important public services gaps, especially among the most vulnerable, and from struggling service providers. This leaves millions of people without access, services underfunded, and water sector governance incomplete or unclear. Roughly one-third of water from these service providers never reaches its intended destination, the report says.As the report notes, Governments are often facing a double challenge of ensuring the transposition of EU legislation and development of wastewater management infrastructure, while also addressing the sector’s fundamental goal of providing sustainable services for all.The analysis recommends that countries look closely at local context to best understand and overcome the challenges that undermine water institutions’ ability to deliver. Governments and water service providers could implement clear accountability and incentive mechanisms, improved financing strategies, including tariffs covering efficient costs and targeted and poor-inclusive subsidies, and improved management practices. Broader water sector financing frameworks will also be needed to overcome an estimated annual €2.5 billion gap in financing."European integration has provided a powerful incentive for progress in provision of affordable and sustainable water and sanitation services. Yet recent EU members, candidates and non-EU countries of the Danube Region must strive to overcome significant gaps in both provision of basic services and governance of the sector" said Ellen Goldstein, World Bank Country Director for South East Europe. "The needs are large, so countries will need to sequence reforms and investments in line with their financial and technical capacities, in collaboration with international partners like the World Bank."The report is accompanied by DANUBIS.org, an online repository that allows utility managers and decision makers to benchmark the performance of more than 400 utilities in 13 countries in the Danube region. The platform also lists key strategic documents and legal texts from each country to facilitate sharing of experiences in the region. The report, conference, and online platform are supported by the World Bank and the International Association of Water Supply Companies in the Danube River Catchment Area (IAWD) under the Danube Water Program with seed financing from Austria. The Danube Water Program supports smart policies, strong utilities, and sustainable and wastewater services by partnering with regional, national, and local stakeholders, promoting an informed policy dialogue around challenges and strengthening the technical and managerial capacity of utilities and institutions.Lead author of the report and head of the Danube Water Program, David Michaud concludes "With this report and platform, countries now have the diagnosis. But the development and implementation of policy decisions are in their hands. We stand ready to help." Show Less -
A good financing plan, an effective budget presupposes clarity on priorities and desired outcomes. There is a solid body of empirical research that shows that it is the quality of education, with “cog... Show More +nitive skills” being measured as outcome, that has powerful effects on an individual’s—and, in the aggregate—on a country’s growth and development potential. The focus on educational attendance, school attainment, and university degrees per se (in itself a function of the relative ease of acquiring the relevant data) does not suffice to generate the desired results, not least by distorting the corresponding analyses and policy discussions.In short, a country’s distribution of income tends to be correlated to, if not caused by, the distribution of skills. Increasing the quality of education alone will help to improve economic outcomes, with the potential to amplify effects by linking corresponding (higher) education sector reforms with other key ingredients to a successful growth and development strategy—comprising, inter alia, well-functioning institutions and markets, well-established property rights, and the openness to foreign ideas, knowledge, and know-how.For this reason, it is critically important to develop a solid foundation for assessing student performance continuously, consistently, and comparably. Kosovo’s participation in PISA is a very important step in this direction and, irrespective of initial results, will help to focus on pupils’ skills and the quality of teaching in secondary education. For the same reasons, Kosovo’s focus on increasing schools’ and universities’ financial autonomy and academic accountability is highly welcome and bodes well for the future. The World Bank has been privileged in supporting Kosovo in this endeavour, starting with pre-university education and —with a new project being developed—opening the doors into higher education as well.The key features of Kosovo’s labour market, ultimately the Achilles’ heel of its economy, are the exceptionally high inactivity rate among the 15–64-year-olds of 60 per cent of the working age population and unemployment rate of 30 per cent of the labour force. Too many Kosovars do not have the right skills to be successful in the labour market, while too many companies cannot find the skills they need to be successful in their particular market. The skills shortage and skills mismatch are challenges that “better” education—in schools, in vocational schools, in colleges, and in universities—can help to address.Following reforms to increase the quality of pre-university general education in Kosovo, building on ongoing measures to developing new curricula, increasing teacher effectiveness, and addressing the challenge of classroom overcrowding and multiple-shift schools, the time has come to provide higher education with a clear, strategic plan, increased transparency, and increased institutional and academic freedom. Students seem ready, as their recent protests had focused on issues of academic quality before anything else, and they need to be part of the debate. One critical reform anchor, the Bologna process, will help Kosovo to integrate its tertiary education system with those elsewhere in Europe, benefiting from experiences made in countries with a less difficult starting point.The focus on quality and, with it, on student assessment and examination systems can be frightful to many, as it will unveil weaknesses and imperfections—but it is necessary to leverage reforms where they can have the largest impact on improving pupils’ and students’ skills.And that is what, in the end, really matters. Show Less -