Jan-Peter Olters interview in Ekonomia magazine

December 20, 2013

Jan-Peter Olters, Country Manager for Kosovo Ekonomia magazine, November 2013

Mr. Olters, let us start from an issue which has created lot of debate and suspicion in Kosovo – the problem of unemployment. KAS, supported by WB, brought the rate of unemployment to 30,9 per cent, or 4,2 per cent less than six months ago. However the registration of population brought the unemployment rate at 44,8 per cent. How were these figures “produced” and how trusted they are? Which indicators have brought these results?

Olters: For the first time in four years, the Labour Force Survey has taken a close look at labor market outcomes in Kosovo. These are the most reliable data and most accurate source for the calculation of the unemployment rate, with methods and methodologies that reflect those being employed by Eurostat and surveys that were verified by the World Bank experts. The public reaction to the findings, including the suspicions you have mentioned, relate to the conceptual distinction between the “economically inactive” segments of the population (capturing also those who have given up looking for work) and the “unemployed” (i.e., those who are actively searching for work).

To give a sense of the numbers, allow me please to summarize the findings as follows. Of a population of about 1.8 million in Kosovo, 1.2 million are considered of “working age”, aged 15 to 64 years of age. Of those, only 37 percent are considered “economically active” and are thus included in the labor force. Even fewer, 25 percent, are actually employed. The remaining 63 percent of the working-age population are “economically inactive”—meaning that about 750 thousand Kosovars are pupils, students, full-time parents, or have given up to seek employment in the formal labor market. They are not included in the labor force. The unemployment rate, in turn, is calculated as the number of active job-seekers (136 thousand) relative to the labor force (439 thousand), which gives us the figure of 31 percent. This relation between “active job-seekers” and “inactive jobless” is reflected in the Government’s own database, which shows that only about 29 percent of those who, at some point, registered themselves as unemployed, have reconfirm their status within a six-month period, as required.

The key information that I draw from the Labour Force Survey is the reconfirmation of a still very high rate of unemployment but, in particular, a very low rate of employment, which is particularly pronounced for the youth. These features explain the prevalence of poverty in the country, notwithstanding a sizeable informal sector, but also give rise to concern for the economy’s ability to generate sustainable rates of dynamic growth in the future. The really alarming figures are the 35 percent of Kosovo’s youth (that is, those between the ages of 15 and 24) who are not in employment, education, or training. This will have long-term effects not only on the economy’s productivity and its growth potential, but also have detrimental effects on the country’s social fabric.

Notwithstanding the “suspicions “to the contrary, the Labour Force Survey has not whitewashed a difficult social situation. To the contrary, it has put the finger exactly at the wounds and, in so doing, has given policymakers and the broader public a clearer understanding on urgent socio-economic challenges and priorities.

As per the differences in unemployment rates for the first two quarter of 2012 and the year as a whole, they relate—as would be expected—to seasonal factors. There is a considerably higher rate of economic activities during the summer and autumn months than during the winter and spring months. Just think of the high-employment sectors agriculture and construction.

If there was a reduction of poverty, where are the people who until yesterday were recorded as unemployed? Did they get a job? Where? Or maybe the criteria and the methodology of registration of unemployed has changed and this has caused the reduction of their number? (As an illustration I will mention that at the end of June 2013, compared to 2011, the number of unemployed in Mitrovica has reduced for 11,7 per cent, in Peja for 45 per cent and in Gjakova for 63 per cent).

Olters: Apart from the statistical and methodological issues, which preclude a direct comparability of the unemployment rates recorded for 2009 and 2013, there have been three developments that have caused a decrease in unemployment. First, Kosovo has been one of only four countries in Europe that has grown in every single year since the onset of the global financial and eurozone crises (Albania, Belarus, and Poland being the other ones), with average growth rates during 2008–12  of more than 4 percent. Such a development leads, of course, to a higher number of jobs in the economy. Second, the outward migration of Kosovars, often to countries in central and northern Europe, has continued, which has (i) taken off pressure from the domestic labor market; and (ii) led to income from remittances, which have made it financially possible for some to withdraw from the labor market altogether. And third, the informal sector, which awaits a more in-depth assessment, has continued to provide income—even if low and unsteady—to quite a number of families.

The improvement in the cadaster, the facilitation of business registration, paired with the Government’s decision to reduce the value-added tax for primary agricultural produce to zero percent, should lead to an increasing rate of formalizing already existent small and micro enterprises and provide them with an opportunity to access capital, modernize, and grow in size and profitability.

Is there any other case in the world where the unemployment rate has dropped from 44,8 per cent to 30,9 per cent during a year?

Olters: Please do not forget that (i) the 44 percent refer to unemployment in 2009; and (ii) there are differences in methodologies applied for 2009 and 2013. But to answer your question, a 15-percent drop of unemployment rates was recorded for Armenia during 2005–08. During the same 3-year period, they fell by 11, 8, 7, and 7 percent for Poland, Bosnia-Herzegovina, Serbia, and Slovakia, respectively.

Why this reduction of the unemployment rate has not been reflected in the reduction of poverty and in the increase of the quality of life in Kosovo?

Olters: Because of the exceptionally low employment rates in Kosovo.

Having in mind the expected rate of economic development, is it possible for the unemployment rate to continue to decrease? If yes, then which economic activities will provide the biggest contribution?

Olters: Over the short-to medium term, I see the most considerable potential for a growth stimulus and additional formal employment in the agricultural sector, including food processing. Already, a number of factors have helped farmers, starting from the land titles and the resultant access to capital, the availability of innovation grants and interest subsidies, the changes to the value-added tax to the absorptive capacity of the domestic market, which is still dominated by expensive food imports from regional neighbors and Western European countries. This has already had positive results, which should become more evident in years to come.

If you consider the previous years, then the biggest disappointment comes from the low level of economic development. From the over 5 per cent rate, recorded three years ago, now it is between 2 and 3 per cent. Why has this happened and is it realistic to look for the blame only at the global economic crisis or at the European debt crisis?

Olters: No doubt, the external environment has not helped and certainly contributed to dampening of growth rates and the disappointment with economic outcomes. Still, Kosovo’s economy has proven resilient, and the foundation has been prepared for a more substantial pro-growth agenda over the medium term. Kosovo can build on a respectable growth record, a stable macro-fiscal situation, and a healthy, liquid, and profitable banking sector. At the same time, the most critical socio-economic challenges, as you have correctly stated, are very low employment and high unemployment rates. These reflect the narrow production base and large external deficits. Available statistics show clearly that goods and services “made in Kosovo” are often not competitive, not even in the domestic market. There are two underlying reasons for that.

First, firms are being constrained in their activities by a not-yet truly attractive business climate, a concept that comprising elements of public infrastructure, functioning institutions, and the uniform implementation of laws. While considerable improvements have been made in the last few years, as reflected in the Doing Business ranking, Kosovo has now the opportunity to focus on a related reform agenda, not least in the context of negotiations on a Stabilization and Association Agreement with the EU.

Second, the fastest way for Kosovo to increase domestic productivity is to “import” frontier technology from abroad. There has been interest, but in important sectors, such as telecommunication, Kosovo appears to be standing in its own way, being afraid of welcoming foreign investors with open arms, thereby dampening investors’ interest also in other sectors. Thus far, Kosovo lacks a national consensus on the private sector’s role in economic development. 

But it is important to note that, not being constrained by macro-fiscal legacy issues from the two external crises, Kosovo has all the ingredients and the opportunity—with the right policies—to accelerate economic development and improve the employment and income situation.

Although WB has been very focused in the energy sector, there is no progress here either. The construction of KRPP seems nowhere. There are indications that the problems in this field will go on for many more years. Then how can we anticipate development when there is no guarantee of qualitative electricity supply, as well as valorization of the greatest asset Kosovo has – coal?

Olters: Yes, unfortunately, the preparatory processes for the replacement investment in the Kosova e Re power plant have been very complex and taken a considerable amount of time. But there are now three pre-qualified consortia that have expressed and ultimately reconfirmed their interest in this project. They are preparing their bids. Especially in a project as strategic as this one, it is critically important not to take any shortcuts and ensure that every step in the process is taken very carefully so that the investment, once realized, will contribute to energy security, ensure energy affordability, and minimize socio-environmental externalities.

There is a “battle” also in relation to the change of the sources of electric energy. Environmentalists are against coal and are making pressure to increase the volume of the energy produced from renewable resources, and to lower the energy produced of coal. What is the position of the WB on this issue? Also, does WB have data on the potential for production of electric energy from renewable resources?

Olters: The debate on the right energy strategy and appropriate energy mix in Kosovo has been long but ultimately constructive. There is a broad—for various purposes often de-emphasized—consensus to integrate into the grid as much renewable energy as is economically viable as quickly as it is possible. That has been different a few years ago. But there is only one remaining disagreement: can the energy that is currently being generated by the Kosovo A power plant be fully replaced by renewable energy? If we thought it were possible, the World Bank would look at the situation differently as well. But its energy and environmental experts, who have looked at this issue very closely, found it impossible, even with very optimistic assumptions on renewable sources of energy. These results you will find in the “Options Study”, which you can find on our website.

Kosovo needs to have access to secure and affordable energy. But it is equally important to stress that there is full commitment by the Government to have any investment be fully compliant with the EU’s very stringent environmental standards, which would take out essentially all local pollutants from a coal-fired power plant. As a result of all of these factors, the energy strategy is being supported by all of Kosovo’s international development partners.

What about the hydro power plant of Zhur, is this a reasonable investment having in mind the hydro potential of this zone and how long can this plant produce during the year?

Olters: According to my knowledge, there is not yet enough information to give a definite response to this question. A feasibility study will have to assess the potential of such a hydro power plant. Only then would one see whether an investment into Zhur is indeed economically viable. 

It seems that for many more years the biggest amounts of public investments will be oriented in infrastructure, sidestepping other activities which are influential for the economic development of the country, such as education. This is creating an absurd situation since Kosovo as a country with a high number of young people ready for work is facing the problem of having the needed and qualified profiles. Does this situation imply changes of government policies on public investment as well as reformation of the education system?

Olters: It is correct, of course, that the education continues to face challenges in overcoming the twin challenges of ensuring access to, and quality of, education. This is a central task as Kosovo’s development potential is seriously constrained if (i) more than a third of young people are excluded from education and the formal labor market; and (ii) young people leave schools and universities with skills not sought in the labor market (while, at the same time, companies cannot find staff with the right competences. Taken recent pronouncements from the highest level of Government, there appears a willingness to increase spending on the education sector even further, beyond the 4.1 percent of GDP that has been spent on education in 2012. If teachers’ salaries are linked, in an explicit fashion, with teacher training and re-accreditation, modern curricula can be taught more quickly and at a higher quality, giving a considerable boost to education outcomes. Other ongoing reforms, as well, such as the transfer of both accountability and financial authority to schools should help to accelerate ongoing reform efforts. In Pristina, the central and municipal governments are finalizing a model school, which is to set standards for school constructions in the future. In many of these reforms, the World Bank is privileged and very pleased to support activities with finances and expertise. To make reforms more sustainable, Kosovo has enrolled in the European Programme for Student Assessment (PISA) so as to anchor education sector reforms in repeated external quality controls.

How much can Kosovo count on the financial support from WB? In which fields is the WB focused and what will be the effect of this support?

Olters: At present, the Government is implementing six World Bank-financed projects, with commitments of about €55 million, and two trust funds with total commitments of about €6.5 million. These operations provide support in a wide array of sectors, including energy, education, public sector reform, cadaster, agriculture, social inclusion, and the financial sector. Two additional projects, in energy efficiency/renewable energy and health, with estimated commitments of more than €40 million, are being prepared to be presented to the World Bank’s Board of Executive Directors before mid-2014. A partial risk guarantee for the energy sector, a water project, and a follow-up education project are also being prepared, with Board dates expected in late 2014 or early 2015.