Fostering Growth in Jobs

October 26, 2011

Jan-Peter Olters

Koha Ditore, No. 5159 (Oct. 26, 2011), p. 11.

It seems contradictory. Kosovo’s economy has grown about twice as fast as countries in Central and Eastern Europe (even when including buoyant Turkey), but its unemployment rate refuses to budge, remaining at levels roughly four times the regional average. What seems particularly concerning is the fact that joblessness, during the last six years, has remained fairly stable, despite average GDP growth rates of around five percent (at which rate income doubles every fifteen years). If this growth performance were maintained or improved upon and an understanding of the root causes for the unemployment puzzle found, it would represent a critical ingredient to economic policies that would ensure that families suffer a little less from uncertain income streams, persistent poverty, and the lack of a professional perspective (even among the young and educated).

To allow Kosovo’s economy from using—effectively and intelligently—its natural resources and the valuable talents of its people, the key question to all stakeholders relates to measures that need to be taken to unleash the full potential of Kosovo’s economy and ensure that living standards approach (possibly surpass) those in neighboring countries. As the external economic environment appears to be deteriorating rapidly (reflecting growing concerns over the effects from large fiscal deficits and unsustainable levels of public debt on either side of the Atlantic), it seems critical to re-assess recent experiences and develop a broad-based understanding of economic-policy priorities over the medium-term horizon.

Available data suggest that two principal factors have fuelled economic growth in recent years, namely government spending and, with gradually decreasing weights, transfers of funds by the diaspora. In an attempt to untie the puzzle of Kosovo’s largely jobless growth experience and draw the appropriate policy lessons from it, it would be important to know whether related resources were spent more on consumer items or those with investment characteristics. In the former case, businesses and (potential) investors would not have any particular reason to adjust their profit expectations upwards and thus refrain from recruiting additional staff. Such a situation would be consistent with low growth rates in productive activities and an increasing reliance on goods and services imported from abroad.  

And here seems to be the crux of the economic conundrum. If the exports of goods and services pay for only a small fraction of imports and if the implementation of large-scale public investments do not provide a sufficiently large demand stimulus (as they rely heavily on foreign inputs), it is the efficiency of production that is the core problem. At least, this is the case if the situation is not a temporary phenomenon, as frequently seen during periods of transition and economic catch-up, but a permanent feature reflecting low productivity (that is, the low quantity and/or quality of output relative to the labor, technology, and capital that is required to produce/provide it).

Such a relationship is measured by the external current account balance, or the difference in the total value of exports of goods and services (including transfers and remittances) and imports. This widely quoted indicator of international competitiveness is a particularly binding constraint for countries that have either fixed their exchange rate to another currency (as is the case in Bosnia-Herzegovina or Macedonia) or are using someone else’s currency altogether (like Kosovo or Montenegro). In such a situation, policymakers are precluded from using currency depreciation as an instrument to boost international competitiveness and/or offset wage increases in excess of productivity growth. In a euroized economy, structural challenges—irrespective of their inherent “political” costs—need to be addressed head on. The euroization of Kosovo’s economy is not negative per se (in fact, it comprises a number of considerable advantages), it “only” implies that, over a longer-term horizon, today’s decisions on economic policies will converge to either of two possible outcomes. In a positive scenario, coordinated reform efforts of the public and private sectors will help to lay the foundation for a strong, competitive economy that is increasingly able to sell its goods and services in foreign markets. If not, the country will continue to struggle with the interplay of low productivity, deficits in the external and fiscal balances, and an economic trajectory not unlike that of Greece (and, to a lesser degree, in other countries in the eurozone’s Southern periphery).

The bar seems high, but the challenge, in Kosovo’s case, appears more daunting on first glance than it actually is. To be successful, the country would need to exploit the so-called “latecomer advantage” and narrow the gap in infrastructure, technology, and skills with higher-income countries quickly. In short, it would need to absorb the relevant standards and their experiences. Why reinvent the wheel? But for this to work (that is, to increase productivity at a sufficiently dynamic pace to allow vacancies and wages to increase ), it appears most effective to concentrate efforts on attracting strategic domestic and foreign direct investments from companies that are able to bring in capital as well as technology and know-how. This means that the quality of investors matters as much as the funds that they are able to bring into the country as only the joint effects from these three aforementioned elements will be able to lift productivity and competitiveness of an economy at Kosovo’s stage of development. That, in turn, would lead to increased profit expectations and, as such, would trigger sustainable growth and lead to more and better paid jobs.

In many respects, investors are easy to understand. Their motivations are clearly defined and consistent across origin, sector, and firm size. To consider Kosovo as a possible location for investment, entrepreneurs need to have confidence in their ability to amortize their outlays within a reasonable period of time and earn profits thereafter. The “confidence” aspect is critical, especially for domestic or foreign factory owners whose networks do not reach into the highest echelons of government. Countries tend to be more successful in attracting investments if investors have developed trust in institutions and the uniform applicability of laws, rules, and regulations. This is often referred to as a country’s “soft” infrastructure. In Kosovo’s case, high-quality, productivity-increasing investments have happened in the—professionally supervised—banking sector, but they remain outstanding in several other potential growth areas.

Further progress in this direction would thus require a focus on the consistent improvement in all elements of successful policymaking, including prudent macro-fiscal management, the proper preparation and sequencing (public) infrastructure, the continued focus on governance-related challenges and the broader institutional investment environment. The latter “umbrella” term comprises features of the economy that relate to the rule of law, the definition and enforcement of property rights (including for real estate), and a properly functioning court system. It is thus not surprising that the European Commission’s recently published Progress Report highlights these very areas as priorities for reform. As such, the document provides critically important input to the derivation of strategic medium-term policy priorities, which, if implemented, will serve two purposes at once, namely to facilitate the realization of Kosovo’s overarching political objective (EU integration) and economic policy goals (more jobs and better living conditions). One country in the region that has been particularly successful last year in translating similar recommendations into policy has been Montenegro. Following the publication of last year’s report, its government devised a detailed action plan, both in terms of timeframe and responsible agencies, for monitoring the implementation of the recommendations given in the European Commission’s report (joint with interim reports that were published on a monthly basis). While much narrower in scope, the World Bank’s recently published “Doing Business” survey has identified similar challenges, pointing to institutional challenges (such as “dealing with construction permits” and “protecting investors”) as subcategories requiring most urgent policy responses.

There is no single policy measure that can foster the increase in productivity, allow for tangible employment growth, and improve overall living conditions. The key to success lies in a series of reforms aimed at strengthening the legal framework, the functioning of public institutions, and the quality of services provided by the public administration—and all that within a sustainable budgetary framework. It remains an arduous journey, but a clear vision of direction is half the success. To use a 2000-year-old quote from Roman philosopher Lucius Annaeus Seneca, “if one does not know to which port one is sailing, no wind is favorable.”

Jan-Peter Olters
Country Manager
World Bank Office in Kosovo