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OPINION

Jan-Peter Olters: The Catch-up with Europe Is Now Possible

Jan-Peter Olters, Country Manager for Kosovo

Tribuna

July 30, 2013

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Analysts’ assessments of Kosovo’s development fluctuate between disastrous (en route to becoming worse) and resilient (with the potential of considerable growth acceleration). Available statistics help to underpin any view on the state of the economy—starting from a youth unemployment rate of 60 percent (terrible), a trade deficit of more than 40 percent of GDP (bad), and average income of about €2,700 (unacceptable) to non-performing loans of 7½ percent of total credits (still acceptable), average real GDP growth rates during 2008–12 GDP of 4.2 percent (respectable), fiscal deficits of 1.6 percent of GDP over the same five-year period (good), public investments of 40 percent of total budgetary expenditure (very good), and a stock of public debt of less than 8.5 percent of GDP (exemplary). All figures are for 2012, unless indicated otherwise.

As in any other economy, unemployment and poverty are lagging indicators. For this reason, it is not surprising that the widespread economic pessimism in Kosovo is only partially reflected in published statistics that have highlighted—even during the crisis years—above-average growth, a solid macro-fiscal and financial performance, and an improved business climate. Unlike its neighbors, Kosovo has managed to protect and strengthen its economic foundation, placing it in a position to take full advantage of any improvement in the external environment.

As such, Kosovo has made considerable inroads into closing the income gap with other countries in Southeastern Europe and the EU. Still, average per-capita income is just one-tenth of EU levels, meaning that the incidence of poverty remains high. It is difficult to find exact numbers and there is no single correct method to estimate poverty rates. Standardized poverty lines, which are devised to allow for international comparisons, are used by the World Bank for Europe. They define a threshold of US$5 per day per person (at purchasing power parities), at which level poverty rates reach about 80 percent in Kosovo. Kosovo’s poverty line, calculated by the Statistical Agency of Kosovo (with support from the World Bank) is set, in nominal terms, at €1.72 per day per person. This definition is equally valid and, would result in a poverty rate in 2011 of “only” 29.7 percent. In the end, however, it does not matter which method is used. Too many Kosovars are too poor, and improvements in living conditions occur at too slow a pace. At current growth rate differentials with the EU, which are at about 3–4 percentage points in Kosovo’s favor, it would take between 60 and 80 years to secure the same living standards. But the same calculations show that if, through the implementation of the right economic policies, Kosovo were able to stimulate GDP growth by another 2 percentage points, the time required to reach EU living standards would fall to 40 to 45 years.

These simple calculations highlight the fact that the central challenge of economic policy-making consists of unlocking Kosovo’s growth potential and providing Kosovars living here with a business climate and work environment that are comparable to those enjoyed by their compatriots living and working abroad, to empower them to achieve similar levels of productivity and, hence, income. Households and firms tend to sense (and correctly so) that the current growth model—largely based on foreign aid, remittances, and public investments—is not sustainable over the medium to long term and will have to be adjusted to achieve dynamic and inclusive rates of economic growth over a prolonged period of time.

Academic and empirical literature has shown that growth does not just happen. It is a conscious choice, and it takes courage to commit to a long-term growth strategy. Government needs to engage the opposition, businesses, labor unions, academia, and the public at large in a constructive dialogue on the fundamentals of a medium- to long-term socio-economic development strategy. Non-government parties have to agree to such an exchange of ideas with counterparts often not trusted on account of differences in ideology and/or the perceived lack of competence/integrity. And not least, firms and households are required to accept the changes and (social) upheaval that are the result of prolonged periods of growth, during which outdated and inefficient production and companies are replaced by new technologies and new firms. Policy-makers must agree to protecting the people, through (pro-)active social policies, rather than jobs—a task that is particularly difficult during election periods. Policymakers’ challenges are further complicated by the fact that Kosovo, at present, lacks a minimal “core consensus” on an overarching economic model, including on the desired roles of the public and private sectors. But, in that, Kosovo is not alone. Electorates in almost every post-conflict, transition, and emerging economy in the process of (re-)establishing legal, institutional, and infrastructure frameworks tend to start off with polarized views on the “best” way forward. But with initial successes and tangible signs of progress come a gradual conversion towards, and a broader acceptance of, a “national economic model”.

In that endeavor, Kosovo not only finds itself at a critical juncture but is helped by the strong macro-fiscal and financial foundation as well as the “seismic shift” in the relations with the EU, to use Commissioner Füle’s words, that have finally opened the hitherto locked doors to negotiations on a Stabilization and Association Agreement (SAA). The link between these two features is clear. The unacceptable unemployment and poverty indicators mentioned above are the result of a narrow production base in Kosovo, reflected in very large trade deficits and caused by low domestic productivity. With macroeconomic stability maintained, critical bottlenecks in the economy remain—despite important improvements in recent years—the rule of law and the business climate on all three levels, viz., laws (and their effective and uniform implementation), the functioning of public institutions (and the quality of public services provided), and the state of critical public infrastructure (both today and over a longer-term horizon). The SAA process offers Kosovo’s policymakers the unique opportunity to focus their attention on economic policy and institutional reforms that are central to helping Kosovo to achieve the overarching EU membership standards of strong democratic governance and a functioning and competitive market economy.

While easier said than done, Kosovo’s challenge thus consists of devising a two-pronged growth strategy with which to (1) maintain the strong macro-fiscal and financial foundation and (2) anchor the institutional reform program firmly within the EU integration process by explicitly linking politico-economic integration and socio-economic development priorities. This clear focus would give Kosovo a long-term “strategic focus” and avoid temptations of short-term “tactical gains” by key stakeholders inside or outside government. The reconciliation of the economic twin objectives of stimulating dynamic rates of economic growth with the necessity to maintain budgetary discipline and macro-fiscal stability can be successful if the government—or, more broadly, the state it governs—agrees to become more strategic. To use the concept advanced by Harvard University professor Philippe Aghion, such a “strategic state” would carefully select areas or sectors (1) where to invest and increase the use of public funds, with a view to increasing the country’s longer-term growth potential and reducing the high rates of unemployment and poverty, and (2) where to reduce budgetary spending, with a clear benchmark on minimizing negative effects on growth and social cohesion. As such, the assessment of Kosovo’s economy—having already demonstrated its resilience in times of economic crisis—as one with a considerable potential for more dynamic rates of sustainable growth reflects not just the hope but a strategy for a better future.

First published in Tribuna on July 26, 2013, No.1188, p. 15-16