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Speeches & Transcripts

Building Bridges Towards A Prosperous Future Growth - A Conscious Choice

December 17, 2015

Jan-Peter Olters Pristina, Kosovo

As Prepared for Delivery

As last speaker in this very distinguished forum, it gives me great pleasure and some confidence to be able to do now what I had hoped to do when planning this conference—viz., to note that, in the definition of key obstacles to, and principal reform priorities for, policies aimed at addressing Kosovo’s key policy priority (the very difficult situation on the labor market), there do not appear to be ideological or political differences as insurmountable as the current political turmoil seems to imply.

This is important for Kosovo’s ongoing efforts to improve living standards towards levels prevailing elsewhere in Europe. While its economy has proven astonishingly resilient even in the most challenging periods during the global financial and eurozone crises, the country’s growth track record—as well as its current growth potential—of about 3½ per cent has proven insufficient to reduce unemployment and economic inactivity in a tangible manner.

As different as the emphases and messages of today’s contributions have been (and I am very grateful for the candor), there has been one overarching theme—viz., the strong emphasis on continuing, if not reinforcing, the reform agenda on governance, the business climate, and the quality of public infrastructure.

The identified priorities, in fact, reinforce my key takeaways from our collaboration during the last 4½ years in Kosovo and 12 years in the Western Balkans altogether. There needs to be some stage, on which constructive debates on development priorities can be had across the political aisle—outside of, and irrespective from, the distractions of the political drama of the day.

No doubt, this is a difficult and, frequently, an untidy process. Plus, it takes courage to commit to a long-term development strategy—courage by those in power to commit to engaging the opposition, businesses, labor unions, academia, civil society, and the public at large in an inclusive dialogue on the fundamentals of an overarching economic model; courage by non-government parties to agree to such a deliberation on most appropriate approaches with counterparts often not trusted on account of differences in ideology and/or the (perceived) lack of competence or integrity; and courage by firms and households to accept—against the more or less pronounced expectations of improvements in the future—the uncertainties, changes, and (social) upheaval that will come with the accompanying socio-economic transformations.

A country’s collective decision to anchor political programs in the overarching objective of supporting the acceleration of growth and faster socio-economic development presupposes a national core consensus and long-term strategic focus that comprises the commitment not to give in to temptations of short-term tactical gains and to exclude from the political debate and conflict those policy areas that are directly linked to—agreed-upon—medium-/long-term development priorities.

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In these struggles, Kosovo is not alone. It is not uncommonthat electorates in post-conflict, transition, and emerging democracies—finding themselves in the process of re-establishing their infrastructure, legal, and institutional frameworks—tend to start off with polarized, apparently irreconcilable views on the best way forward.

That includes also my own country. Western Germany in the early 1950s—morally and politically bankrupt, economically destroyed—needed to look for a new start. It took eight years after statehood in 1949 before a core consensus on development priorities started to emerge. Wohlstand für alle (prosperity for everyone) was a book published in 1957 through which Ludwig Erhard—at the time Minister of Economy in Western Germany—popularized the concept of a social market economy and succeeded in securing its gradual acceptance as the country’s anchor of its post-war economic model.

Originally coined by the Freiburg School around Walter Eucken and Alfred Müller-Armack, the concept of a social market economy, in which competition and free initiative were to be channeled by a rules-defining, rules-enforcing, and rules-adhering state towards the overarching goal of increased social equity, aimed at combining the efficiency of a free-market economy with an explicitly stated social objective constraining market outcomes at either end of the income distribution. In Erhard’s view, the prerequisite for achieving such an outcome was the consistent focus on, and dedication to, domestic productivity—in itself, a necessary pre-condition for rising wages and increasing living standards:

“Through competition, progress and profits … can be redistributed and, at the same time, personal ambition for performance and achievement safeguarded. An inherent element of the conviction that it is indeed possible to increase prosperity this way is the objective [and promise] to share with the workers the fruits of rising productivity in the form of corresponding and permanent increases in wages.”

The main opposition party that had previously advocated a more state-led economic model agreed two years later, thereby paving the way for its subsequent ascent to (shared) power.

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Evidently, the social market economy is not the only economic model that has allowed countries to achieve high per-capita GDP levels and acceptable levels of shared prosperity. In fact, the actual model matters less than the general commitment to related policies and its underlying objectives. A glance at the list of the world’s highest-income economies shows that their organizing principles range from dirigiste models prevailing in the up-and-coming south-eastern Asian countries, to generous Nordic welfare states, western European social market economies, and considerably more unfettered Anglo-Saxon models. None of these models are right per se, they have to be appropriate in a given context and the right circumstances.

While these development models support market-based economies (one critical prerequisite for successful growth strategies), they vary substantially, largely reflecting differences in natural endowments, legacies, experiences, and cultures. Whether in Singapore, Sweden, Luxembourg, or the US, every economic model chosen has tended to reflect national core values and a core consensus that, over the decades, have been reconfirmed and revalidated by the succession of governments of different colors.

Throughout my mandate here, Kosovars have debated (and at times battled for) core elements of their economic model, including the envisaged role of the private sector. In this, privatizations have been a particularly delicate subject, where two out of three necessary public debates had been had. 

Considerable attention was paid to process and transparency, critically important elements. The amounts to be recorded in the budget, similarly importantly, resulted in an equally intensive public debate. But there was little in terms of expectations vis-à-vis the private sector and the investors’ ability to bring in know-how, technology, and standards that would help to modernize entire sectors of the economy and lift their productivity and competitiveness.

Against this backdrop, I would be truly delighted if, with today’s event, even the smallest step could be taken in the direction of an across-the-aisle understanding of where possible common grounds might be.

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It would be urgently needed. It is clear that, with only about 27 per cent of working-age Kosovars being gainfully employed, the country cannot afford a further succession of political crises, and certainly not one like last year’s. That would risk weakening those features of the economy that are actually astonishingly strong (including its macro-fiscal and financial foundations), while amplifying existing weaknesses of Kosovo’s social outcomes, the private sector’s insufficient productivity, and large external deficits.

It should not be overlooked that there are a number of encouraging developments in some of Kosovo’s growth sectors—e.g., in agriculture, food processing, or ICT—, where the relative ratio of competitive products and services made in Kosovo are increasing and sectoral growth rates are exceeding the average, thereby generating the type of endogenous growth that has remained elusive thus far for other main sectors of Kosovo’s economy. Key to the success in fostering “catch-up” growth is the ability to import standards and technologies closer to the innovative frontier elsewhere.

Apart from academic cross-fertilization as the result of the international integration of Kosovo’s education system, the principal policy instrument would consist of attracting foreign investments of the scale, scope, and quality to increase domestic productivity in key sectors of its economy. For this to materialize, a country needs to offer an environment, in which investors can develop confidence over as long a time horizon as possible.

In Kosovo’s case, investors need secure, affordable (and cleanest-possible) energy—still the key obstacle in Kosovo’s economic transformation—, but also the confidence in their ability to implement investments within a clear timeline and at predictable costs. Everything else would invalidate any cost and profit calculations and result in a decision against Kosovo as a site of investment and production.

For governments, this is especially difficult, as all policy instruments that, at best, help to change favorably potential investors’ perceptions and outlook are indirect in nature. There is not a single set of policies that would achieve that.

However, a possible guide and inspiration in this effort might be the Growth Commission’s Growth Report, which has not received the attention it would have deserved—mainly for the reason that it was published in the worst possible year in 2008, i.e., during the year, in which everyone talked about crisis economics and not about growth and development.

This report was the result of a most comprehensive exercise involving the most notable development economists, policy-makers, and private sector representatives that sought to distil the five striking points of resemblance among those thirteen countries that have managed to maintain growth rates in excess of more than 7 percent over a period of more than 25 years. Such a growth performance would quintuple income.

The first common feature among these fastest growing countries—maybe to no surprise—has been macro-economic stability, a policy outcome where Kosovo has had very good success in recent years. Macro-fiscal and financial stability represents a secure planning horizon for private investors, facilitating the calculation, over the lifespan of an investment project, of related costs, additional income, and expected net profits. Here, Kosovo simply needs to maintain its focus.

The second core feature relates to a functioning market economy, in which price and quality considerations alone determine the economic success and failure of companies competing in the market place and of individuals offering their talents, skills, and experiences in the labor market. One important impetus for related reforms comes from the ongoing integration process and the approximation to standards prevailing in the EU.

Not only is a functioning market economy the anchor of the EU’s 1993 set of economic accession criteria, the so-called Copenhagen criteria, which are assessed annually in the EU’s corresponding Progress Reports, but also is it the precondition for a level playing field among competitors that helps to ensure that decisions are taken on the basis of market signals (price and quality). Many contributions today have highlighted the need for a continued focus on this aspect of Kosovo’s overarching economic architecture.

Thirdly, the private and public sectors of high-growth countries have consistently foregone current consumption with a view to securing high rates of savings and investments. The Growth Report emphasized that this would require—implicitly or explicitly—a “fundamental bargain between the present and the future”. The electorate would have to trust that successive governments, even if led by different political parties, would honor the promises of future rewards.

In addition, for these promises to be credible and sustainable, including in a fluid political environment, they would have to be sufficiently inclusive to leave citizens confident that they (and their children) would eventually share in, and benefit from, increased future welfare.

This orientation towards expected returns beyond any given government’s term in office demands capable, credible, and committed governments, both present and future. This fourth anchor relates to the Growth Report’s principal message to policy-makers that “growth does not just happen.”

And finally, successful economies are open, willing to import ideas, technology, and know-how from the rest of the world and exploit existing demand in global markets. Here as well, Kosovo—contrary to many other countries at a similar level of per capita income—finds itself in a favorable position, not least because of its proximity to the EU and the status as potential member country.

The Bologna process supports reforms aimed at strengthening education outcomes, thereby and improving graduates’ skills and perspectives in the labor market. In parallel, critical reforms are being debated, prepared, and implemented to strengthen the business and investment climate. In this, Kosovo will continue to be able to rely also on the World Bank’s fullest support.

The final phase on the consultation on the successor strategy with the World Bank will provide important opportunities to advance the socio-economic development agenda, ideally on the basis of a broadly shared understanding of the most fundamental pillars of an adjusted economic model aimed at increasing Kosovo’s growth potential and bringing down economic inactivity and unemployment. It can be done, it is a choice, as difficult and painful as it might be.

Let me close by expressing my most sincere gratitude to all of you for 4½ years of joint work and important results in this development journey. It was an interim section, and it could only have been an interim section. That said, let me end with my most heartfelt wishes for every success with the wisdom that has withstood the test of almost 2,000 years.

Ignoranti, quem portat petat, nullus suus ventus est—For someone who does not know the port to which he is sailing, no wind is favorable to him. That was Lucius Annaeus Seneca in his Moral Letters published in the year 65.

I know you know your destination. You’ll be taking the headwinds coming your way and tack against the wind. Progress does not have to come in a straight line.

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