Eyes of the Fleet

Eyes of the Fleet

Thursday, January 27, 2005

Kosovo Still a Mess and Getting Worse

The Guardian runs a column by Simon Tisdale which captures the essence of the UN "nation building" non-success in Kosovo: Time running out to stop Kosovo's descent in violence.
Kosovo is fast becoming "the black hole of Europe" and could descend into renewed violence within weeks unless the EU takes urgent action, senior diplomats and international experts warned in Brussels this week.

But continuing EU indecision over the breakaway province's demand for independence from Serbia, coupled with the ethnic Albanian majority's failure to embrace reform and respect Serb minority rights, are paralysing plans to launch "final status" talks this year.
No one seems to have a good "exit strategy."

Earlier posts on Kosovo here and here.

Update; International Crisis Group report
Time is running out in Kosovo. The status quo will not hold. As evidenced by the deadly rioting in March 2004, Kosovo Albanians are frustrated with their unresolved status, the economic situation, and the problems of dealing with the past. Either 2005 will see the start of a final status1 solution that consolidates peace and development or Kosovo may return to conflict and generate regional instability.

Update 2/1/05: Not too surprisingly, ICG board member Gen. Wesley Clark has an op-ed in the print Wall Street Journal making the same ICG points and calling for international cooperation to "Set Kosovo Free." Gen. Clark does not like to admit he was "gamed" by the Kosovar Albanians, who ( while legitimately facing a Serbian threat) slightly exaggerated the dangers to the media to gain a "higher goal"- an independent state. I think Clark is clearly wrong when he writes:
...[I}t is important to remember that Kosovo has already held two democratic elections and developed the foundations of a modern, functioning economy."

Update 3: I don't know what economy Clark is looking at, but it can't be the same one described by a member of the Economic and Social Research Institute (ESRI) here

1. A deepening crisis

Ever since the first international donor conference for post-war Kosovo was held in 1999, one widely shared policy objective was "setting the stage for private sector-led recovery and long-term growth". The evidence is mounting that this objective has not been achieved. A look at official macroeconomic data reveals the paradox of post-war developments.

Official statistics presented at various donors' conferences appeared to show impressive GDP growth performance: 11 per cent in 2001, 7 per cent in 2002. The 2003 Kosovo budget envisaged 18 to 19 per cent growth rates for the period 2003 to 2005, and based its revenue forecast on these growth projections.

At the same time, however, official estimates of the level of Kosovo's GDP have continuously been revised downwards: 

In December 2001, the IMF estimated Kosovo's GDP at €1.85 billion.

In June 2003, the IMF estimated Kosovo's GDP at €1.57 billion.

In December 2003, the International Financial Institutions and UNMIK estimated Kosovo's GDP at € 1.34 billion.

This shows a disturbing lack of any reliable statistical base for evaluating the level of activity in Kosovo upon which growth figures could be calculated. It also reveals a growing sense of unease among international officials about the nature of the post-war economy.

To go beyond the official figures, it is important to look at what has actually changed in the structures of the Kosovo economy in the post-war period. Most growth since 1999 took place in the trade and retail sector, in public administration and above all in the construction sector. It has been estimated that €444 million was spent in 1999/2000 on repair of housing, public buildings and infrastructure, with 21 per cent of materials purchased locally. Brick factories did a lively business, as did carpenters and importers of tiles or furniture. However, as in any post-conflict country, the reconstruction boom was short-lived. By 2001, spending on construction in Kosovo had dropped to only 40 per cent of its 2000 high, and in 2002 it was expected to reach only 13 per cent. In the rural municipality of Viti in South East Kosovo, ESI visited 69 of the 81 construction companies listed in the business register in 2003, and found that only 39 were still operating.

The private sector that has emerged since 1999 is predominantly small-scale, low-capital-intensive ventures in trade and construction. Some local entrepreneurs were able to generate quick wealth as importers. However, apart from building materials, some furniture production and a small food-processing sector, there is hardly any local manufacturing. In Pristina's "industrial zone", the largest in Kosovo, 66 plots were rented out in 2002: only 16 were used for production, all with three employees or less, and most were producing doors and window frames.

The post-war boom was also transfer-financed, and therefore unsustainable. The estimated total public expenditure in 2000 in Kosovo was €6.3 billion. In 2003, this had gone down to €3.1 billion (see table). These are very rough estimates, undertaken by the Macroeconomic Policy Unit of the Ministry of Finance and Economy. But the overall implications are clear: GDP growth in Kosovo's economy was driven by external transfers, rather than from any lasting increase in the productivity of Kosovo's enterprises. As a result, as budgetary support and reconstruction aid are withdrawn, Kosovo's economy is almost certain to contract.

Kosovo's post-war economic development depended not just on donor-financed external aid, but also on transfers from the Kosovo diaspora, which made up a significant component of household income. In 2002, the Ministry of Finance and Economy estimated that, of Kosovo's total income of €1,570 million, €720 million came from cash remittances. According to these figures, Kosovo households received more cash income from relatives abroad than they did from working in Kosovo. However, with the route to new emigration to the EU now blocked, there is a substantial risk that remittance income will decline in the coming years.

These factors explain why, given the dependence on international transfers and consumption by international organisations and remittances, Kosovo's economic growth in the post-war period cannot be taken as representative of the future pattern of growth. It also shows why the depth of the structural economic problems did not become apparent during the construction boom. Massive international support to Kosovo has had an effect similar to what the discovery of oil might have had. Without raising the productivity of the work force, producing goods competitive at home or abroad or changing the nature of a backward rural economy, Kosovo could afford massive imports. In 2003, Kosovo imports totalled €968.5 million, while exports (mostly mushrooms, timber and scrap metal) amounted to only €36.3 million. This in turn allowed the government to collect easy revenues by taxing imports at the border, enabling rapid expansion in public-sector employment. Five years after the war, Kosovo's budget remains highly dependent on taxing imports at the border.

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