Political Consensus for the Development of Economy

July 21, 2014

Jan-Peter Olters, Country Manager for Kosovo Koha Ditore

Koha Ditore: Since 2008, the Government of Kosovo had road construction as a priority, including here the three next years that will swallow 33% of capital investments. Has this concentration only on roads been a mistake? Would investments in other sectors lead to more jobs and sustainable growth?

Olters: Especially as a small, landlocked country, a transport network that guarantees secure access to seaports and the most important trading partners is an important priority. It still holds true that the only route to markets in central Europe, such as Germany or Switzerland, that does not cross a country that has not yet recognized Kosovo’s independence is via Albania and Italy. There is no doubt that Route 7—if well maintained—will continue to generate important economic benefits. Any discussion on whether the money spent on the motorway to Albania has maximized the development impact, relative to the same amount of money that could have been spent on alternative projects, has become purely academic.

However, looking forward to the next Government’s mandate, it is clear that the fiscal space (even prior to the signature under the contract for the motorway to Macedonia) has been narrowing at an unsustainably fast pace—from already committed additional expenditure obligations (salaries, pensions, war veterans, and political prisoners) to the increased likelihood of emergency responses required to avoid an otherwise looming energy crisis (imports, infrastructure rehabilitation, and new generation investments), already visible shortfalls in tax and revenue collections, clear constraints to the Government’s ability to continue domestic borrowing at current magnitudes and/or interest rates, and the urgent need to avoid the accumulation of payment arrears, which would asphyxiate any potential for growth acceleration. Very difficult decisions will await the next Government in addressing urgent development priorities and, in parallel, ensuring macro-fiscal stability. 

K.D.: Do the limitations you have mentioned, and adding to those the signature of a contract with 600 million euro, mean that Kosovo's economy will continue to limp?

Olters: Given the constraints on the revenue, expenditure, and financing sides of the budget, it means foremost that the next government will have to pay particular and continuous attention to the “value for money” of any euro spent from the budget, revisit tax policy and administration, and put to the top of the agenda any reforms that would increase the efficiency of the public administration. This would help public finances, support the economy, and support Kosovo’s European integration objectives.

K.D.: Does the fact that economic growth is not able to pass 3.5% means that highways are increasing employment and impacting economic growth only during the time of their construction?

Olters: While Kosovo’s average growth performance in recent years has been superior to that of neighboring countries, it has not sufficed to generate significant improvements on the labor market. To be able to pull an economy forward and place the private sector in a position to innovate, expand, and generate employment, every single link in a chain has to be strong. A good transport network facilitates trade, and that is important, but it does not secure the production of goods or the provision of services at qualities required to be successful in domestic and foreign markets. To accelerate growth sustainably to rates above 3½ or 4 percent requires the economy to close the gap in domestic productivity with other countries in Europe, to be innovative, and to be able to offer goods and services—as one Kosovo entrepreneur once told me—with German quality at Balkan prices. This would require a much broader, more focused reform agenda capturing the legal and institutional superstructure, public infrastructure, and an education sector that enables every Kosovar of working age to contribute to the best of his or her ability to the country’s prosperity.

K.D.: What are the consequences for the economy of Kosovo from the orientation of investments in one sector only, having in mind the large unemployment and this level of poverty?

Olters: Thinking of development policies as a chain with many links, this means that it does not suffice if only one or only a few links are strong. In fact, the weakest link determines the chain’s overall strength. I hope that, with a new Government looking at the time span of an entire mandate, Kosovo will be devising a development strategy and an economic model that works for its economy and is supported across the political aisle. At present, the broadly shared vision of such an economic model—in fact, a commonly shared view of the private sector’s role in the economy—is missing and, as a result, adds political tension and insecurity to the implementation of development policies in strategic sectors.

K.D.: According to you, what should be the basis of this new economic vision, where should it rest?

Olters: To date, growth has largely been driven by factors that have a temporary effect on growth, including publicly financed investments, diaspora remittances, and donor support. All of these ingredients are helpful, but they need to be embedded in policies that place at their center the question of what would help to increase the productivity of private enterprises operating in Kosovo or those considering to invest here. This would “ endogenize”  growth and have permanent effects on Kosovo’s economy. And it does not necessarily mean that Kosovo’s enterprises have to be global innovators. In many sectors of Kosovo’s economy, growth can be stimulated by the “catch up” to standards prevailing elsewhere, having domestically produced products become competitive first in the local market, then regionally and ultimately internationally. A market of 500 million consumers awaits right at Kosovo’s doorsteps, to which it has privileged access.

K.D.: Earlier WB officials said that Kosovo still has not achieved to build a sector which would be the basis for economic development like Serbia and Macedonia did. In which sectors should Kosovo concentrate and where does it have comparative advantage over the other countries in the region?

Olters: To be able to attract—foreign or domestic—investments of the scale and scope to bring Kosovo to the frontier of current technologies and standards requires energy security, predictable governance, and well-educated and well-trained people. During the time required to build the foundations for a strong economy, especially in energy and education, the growth stimulus in the short to medium term appears to be coming from agriculture, a sector that is succeeding in increasing the productivity and quality of its production. You will notice it yourself: it is more and more likely that, when doing your grocery shopping, you will pick up a product “made in Kosovo” from the market or supermarket.

K.D.: In which sectors should investments concentrate in order to have growth of employment and poverty reduction?

Olters: In the end, private investors have to decide that they want to come to Kosovo instead of going to another country, because it is easier and more likely to be successful here than elsewhere. That what Governments can do is to provide to the private sector a climate of good laws, well-functioning institutions, and modern, well-maintained public infrastructure. That will help to have the Kosovo eagle follow the Asian tigers. 

K.D.: To what extent is education system adapted to the needs of the labor market? What should be done to increase the quality in education and to have more professions that adapt to the needs of Kosovo's economy?

Olters: Important first steps have been done to integrate standards and curricula in the education sector to developments in the European Union. The external quality control, which is inherent in such a reform agenda, helps to provide students with a strong basic knowledge in mathematics, natural and social sciences, and languages. This will help the private sector to complement formal education with firm-specific training so as to lift the quality and standards of employees in the workforce. To make a real impact, schools and universities cannot be left alone and need the feedback from chambers of commerce, economic think tanks, and all institutions that produce labor demand statistics.

K.D.: During the past years we saw a fall of foreign investments while at the moment we have the lowest level of GDP, the highest level of unemployment and a record trade deficit. What do these factors tell? How challenging will it be for Kosovo to catch-up with the countries in the region?

Olters: As I mentioned earlier, it would help immensely if there were a core consensus on an economic model and the private sector’s role within it. For instance, the telecommunications privatization failed, because there was no political consensus, not because there was no investors’ interest. The public debate over the privatization of the electricity distribution company focused on the revenues to the budget, while overlooking the potential and expectations inherent in the comprehensive modernization of a sector in desperate need of upgrade. The insurance sector should welcome, rather than resist, the discussion on having Kosovo benefit from the international motor vehicle insurance, the green card, as this would stimulate competition among the existing insurance companies and lead to a sector with similar levels of standards than those prevailing elsewhere in the region and in Europe. These changes are often feared, as they bring with them upheaval and uncertainty. Kosovo is capable but also needs to be open to import the current knowledge and highest standards from the best countries worldwide.

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