Jan-Peter Olters: Toward Sustained Rates of Dynamic Growth in Kosovo

December 18, 2013

Jan-Peter Olters, Country Manager for Kosovo The Horizon, American Chamber of Commerce in Kosovo, Nov 2013

“The problem that is usually being visualized, is how capitalism administers existing structures,” Austrian-American economist Joseph Schumpeter wrote in 1942, “whereas the relevant problem is how it creates and destroys them.” In many debates on economic development, it is often underemphasized that dynamic rates of economic growth are the result of an almost violent process, unsettling for companies and households, and a conscious and courageous choice by all who commit to it.

Almost six years after independence, Kosovo finds itself at a critical juncture, at which important development priorities will need to be defined to be able to set its economy onto the right track towards vigorous growth and lasting improvements in social indicators. Given the recent performance of its economy, Kosovo is currently well-positioned to base a long-term growth strategy on the foundation of macro-fiscal and financial stability and avoid having existing fragilities (the private sector’s low productivity, high external deficits, and weak social indicators) pull down the economy as a whole. But its current economic model is unsustainable, largely because the principal engines of growth thus far—foreign aid, large public investments, and remittances from the (generally successful) diaspora—will not suffice to maintain Kosovo’s recent growth performance, let alone to generate catch-up growth rates sufficiently dynamic to close (over a reasonable period of time) the income gap with other countries in the EU.

Policymakers’ challenges are complicated by the absence of (i) principal macro-economic policy tools; and (ii) a minimal “core consensus” on an overarching economic model (including the desired roles of the public and private sectors). Kosovars have been debating, often quite antagonistically, core elements of “their” economic model without converging on a consensus strategy (except for the shared conviction that lowering the high rates of unemployment/poverty and providing its young population with a long-term economic perspective would have to be the objective). The conceptual link between the economy’s strong features (its strong macro-fiscal and financial foundations) and weak ones (the poor social outcomes) remains the private sector’s insufficient productivity, largely reflecting remaining rule-of-law and business climate bottlenecks. Especially since mid-2011, a comprehensive reform program has been implemented, with tangible results on the ground. However, obstacles for the private sector to start and operate a business tend to remain higher than those in southeastern Europe or the new EU member states. As of yet unaddressed bottlenecks in public infrastructure, state institutions, and (the implementation and uniform enforcement of) laws have affected detrimentally private-sector productivity. This prevents domestic firms from catching up with their main competitors abroad. As a result, too large a percentage of products and services made in Kosovo are not (yet) competitive—not even in the domestic market.

A sufficient number of successful SMEs, typically the backbone of any successful market economy, would allow a solid “middle class” to emerge. In its absence, it is difficult to perceive political dynamics that would foster the convergence towards Kosovo’s own economic model. A “meritoriously egalitarian” society with a lower degree of income inequality and/or higher middle-class per-capita income levels would reduce the frequency and profundity of successive (post-electoral) reversals of economic policies, thereby fostering investor confidence.

Kosovo faces these challenges like many other countries that aim at improving their economy’s growth performance. Against this backdrop, a Commission on Growth and Development (the “Growth Commission”), comprising 21 accomplished economists (including two Nobel laureates), business leaders, and policymakers (mostly from the developing world), undertook the monumental task a few years ago of filtering through the existing growth literature and available policy experience in this area, with a view to distilling common characteristics and policy decisions of 13 countries that—over the period of at least a quarter of a century—managed to grow at an average rate of more than 7 percent. The Growth Report’s inherent value rests on the encouraging findings: “One might call it a report on ‘economic miracles’,” its members argued, “except that we believe the term is a misnomer. Unlike miracles, sustained, high growth can be explained and, we hope, repeated.”

The prospect of country-level reproducibility is, however, constrained by the need for an across-the-aisle, long-term commitment to the overarching growth objectives and the corresponding policies required for these to be achieved: “Fast, sustained growth does not happen spontaneously,” the Growth Commission warned. “It requires a long-term commitment by a country’s political leaders, a commitment pursued with patience, perseverance, and pragmatism.”

This makes growth a political choice. To facilitate the implementation of such a pro-growth decision, the Growth Report filtered out “five striking points of resemblance”, recommending that policymakers focus on a few core areas. The overarching challenge consisted of devising a long-term growth strategy that was based on capable, credible, and committed governments and high rates of savings and investments (which, in turn, required an at least implicit “social contract” on the distribution of expected benefits). Further, countries needed the consistent focus on (i) establishing a legal and institutional framework, joint with the required public infrastructure, to develop a fully functioning market economy; and (ii) taking full advantage of the opportunities offered by the global economy in terms of knowledge, technology, and know-how.

Partly linked to the EU integration process, Kosovo has already put in place important elements of an overarching growth strategy, focusing on the business climate, the improved functioning of public institutions, and an institutional framework supporting the productivity of Kosovo’s economy. Eventual EU membership, paired with higher employment rates, could serve as the natural anchor for a comprehensive growth agenda. The opening of negotiations on a Stabilization and Association Agreement with the EU should facilitate a process of linking the priorities of politico-economic integration and socio-economic development, which would result in a clearer view on key ingredients to Kosovo’s economic model. Once agreed, it would give Kosovo a long-term “strategic focus” and avoid temptations of short-term “tactical gains” (particularly prevalent during election periods).