KOSOVO: Birth of a nation

13/05/2010 | Andrea Armeni

Two years after it declared independence, Kosovo remains beset by corruption, crippling unemployment and a continued lack of international recognition. At issue is the very sustainability of the state

Kosovo has become a household name, out of proportion with its reality as a poor, stamp-sized new country of two million people nestled in the Balkans. Formerly a neglected province in Tito’s Yugoslavia, it rose to notoriety when Serbia made it a battered ethnic Albanian enclave, its population excluded from public life by the Belgrade government.

Things looked up after Nato intervened militarily in 1998: a UN mission took charge for a decade, and in February 2008, Kosovo declared independence with the blessing of the US and most of the EU.

Since then, the Republic of Kosovo has been taking shape. It has adopted a constitution and holds regular elections; it became a member of the IMF and the World Bank and has established significant international relations. Kosovo has the makings of a country, and much has gone well since independence. Fears of violence and unrest following independence did not materialize and the country has largely stabilized and begun the process of institutionalization.

But its international status is still an issue. After recognition by some 60 or so states, the only acknowledgements of its right to exist over the past six months have come from Malawi, Mauritania, Swaziland and Vanuatu. China and Russia remain aligned with Serbia against its recognition, their veto power dashing any prospects for Kosovo’s UN membership and its benefits (including its own telephone country code, airport code, and Fifa football team).

And even though independence is generally considered irreversible, a pronouncement by the International Court of Justice still clouds the issue of its legitimacy.

Belgrade’s opposition and that of Kosovo’s own Serbian minority also remain a concern. Even UN secretary-general Ban Ki-moon recently expressed worries over the rising violence in these Serbian-populated areas, where Kosovo hardly has any control and organized crime thrives.

But the main remaining worries are Kosovo’s institutional progress and economic viability independent of international support.

A DIFFICULT TRANSITION

Pieter Feith, EU special representative and international civilian representative, is one of the protagonists of Kosovo’s rebuilding. Despite its progress, Feith recently noted that Kosovo’s “transition from the present to a European future is fraught with numerous challenges... the fight against organized crime and corruption, revamping the judicial system and ensuring full accountability of public institutions.”

According to Marko Prelec, Balkans project director with the International Crisis Group: “It’s almost as if there were no functional civil law system.” He says the roots of the problem go back “to the nine years that the UN administered Kosovo, and further back to the last decade of Serb rule”, during which Kosovars were shut out.

Now the country has to build itself from scratch: unlike other post-Yugoslav countries, Kosovo did not enjoy the option of coopting existing institutions.

Andrea Capussela, head of the Economic and Fiscal Affairs Unit of the International Civilian Office, says: “Kosovo’s institutions are young and relatively inefficient, but they are stable, and there is broad political consensus on the main tenets of an economic system based on the free market.

“Compared to other countries in transition, Kosovo is freer to design more efficient institutions. With determined political will, considerable improvements are possible”.

Some international institutions have started to scale down. Asked by Emerging Markets about plans for their withdrawal, prime minister Hashim Thaci forecast that it will take place “at the right time”. Nato, however, said recently that current conditions do not warrant troop reduction. Meanwhile, white UN jeeps and KFOR military vehicles to this day share the road with sputtering eastern bloc cars and the sedans of the EU bodies. At Pristina’s traditional Balkan restaurants, fine European bureaucratic suits and Nato-country military uniforms share space with the local political high ranks. For their part, US marines broadcast a television show combining American pop songs and entreaties to harmonious coexistence.

The complex dynamics between a fledgling government and international institutions bring numerous challenges. To this day, the multiplicity of actors has kept Kosovo’s weak institutions in an unweaned limbo.

Merita Mustafa, programme manager for the Kosovo Democracy Institute’s Transparency and Corruption Program, says the assortment of institutions makes it possible for accusations of corruption and blame to be passed around – something that could be avoided if the national government had ultimate accountability.

Kosovo’s economy and finance minister Ahmet Shala tells Emerging Markets that the proliferation of international entities involved in rebuilding Kosovo has at times even impeded growth. The country’s effort to please everybody, says Shala, “has created at least a one-year delay for the harmonization of opinion of different stakeholders at the global level for Kosovo projects”.

Recriminations aside, Kosovo must start building. And fast. Shala believes the strengthening of the institutional infrastructure will follow economic development, rather than be a precondition for it. “This is kind of a chicken and egg game,” he says. “The rule of law is important, but it will come as an effective tool only when the economic development is in place.”

Others disagree on the priorities. “Weak administrative capacity is a problem in Kosovo and is an obstacle to economic growth,” says Capussela of the International Civilian Office.

Leke Musa, chief executive director of the American Chamber of Commerce in Kosovo, points to investors’ lack of exuberance toward Kosovo’s business environment. “Government officials and agencies are still not up to a level that you could consider that they are business friendly,” says Musa. “The country’s leaders are not doing what they should be doing to foster the proper economic environment.”

Shala recognizes that the business climate “is not at the level where everybody would want it to be, but within two years we have achieved a lot”.

There is no doubt, however, that the current situation has taken its toll. According to a draft report from the Pristina-based Foreign Policy Club: “High levels of corruption, noted as ubiquitous in each report presented to date, ultimately damage Kosovo’s chances to be considered an attractive environment for business development... Kosovo is lagging behind with its offer to serious potential investors when compared to the region.”

In other words: corruption is everywhere and, to this day, there is little evidence of any concrete steps to improve this scenario. Prelec says corruption “was not seen as a priority by the government. There was a substantial current of opinion in the Kosovo political elite as a whole that was comfortable with an unregulated environment and a weak and non-functioning set of legal institutions.”

Nevertheless, Prime Minister Thaci is adamant that corruption has been properly tackled and insists on downplaying its extent. In an interview with Emerging Markets he repeatedly emphasizes his approach of “zero tolerance” toward corruption – one that few but he appear to have noticed.

“Kosovo is a country of transparency and the rule of law. In this regard, I am very determined. There will continue to be full transparency; there will be full respect for the law,” says Thaci.

Prelec says the government cannot be held solely to blame for slow progress. “We have to give Thaci the benefit of the doubt,” he says, as reforms have started to happen. “He is moving quite quickly... he is acting in the way that a prime minister who is serious about this would act. He’s doing what you would expect.”

But the question remains, say observers, why Thaci has not done more, particularly when he is in a position to rally the country around the notion of newly gained statehood.

“Corruption has just been growing since independence,” Mustafa tells Emerging Markets. The country’s leadership “has not had the will to fight corruption. [The leadership] is only [making pronouncements], but in practice it is not doing anything; it is only expanding the opportunities for corruption.” The World Bank recently concluded that most economic indicators have worsened over the last year. Procurement without tender, for example – a sure recipe for untoward practices and lack of transparency – increased dramatically.

For the time being, judges are paid half the salary of equivalent government employees. Salary reform, not expected until 2013, is fundamental, not just to reduce incentives to act corruptly, but also, says Prelec, to “introduce parity between the judicial branch and the other branches. If judges and prosecutors are making half what others are making in the executive branch or the legislative branch, it sends the message that what you do is not important, don’t bother.”

In a possible sign of newfound willingness within the government to stamp out graft, Eulex, the EU’s Rule of Law Mission in Kosovo, has formally placed the country’s transportation minister under investigation. This is a marked departure from reports in preceding months that Thaci had rebuffed Feith’s presentation of evidence of embezzlement in the ministry. But it could also simply represent a concession to international pressures.

Either way, much remains to be done. “The EU has its work cut out to partner with Kosovo in combating crime and corruption,” says Feith. “Even the US ambassador to Kosovo has repeatedly emphasized that members of the political elite cannot consider themselves above the law.”

Kosovo’s institutional weaknesses are matched by a frail regulatory regime and subpar infrastructure, in particular energy, and an economy waiting for triage. In sum, the very sustainability of the state remains at issue.

ECONOMIC TROUBLES

Walking around Pristina one could be forgiven for thinking all is well. Lively bars and cafés provide the backdrop for the young and well-heeled. But lurking around corners, the scars of its troubled past are unavoidable – a fact which renders these pockets of comfort more reminiscent of many Latin American capitals, where the elite gather in isolated enclaves, than the integrated middle class of most European cities. One in 10 Kosovars lives below the poverty line.

During the 1990s, Serbia effectively shut its ethnic Albanian population out of institutional life, leaving as sole educational outlet underground makeshift schools in people’s homes. The results of exclusion are felt to this day. Kosovo’s population growth – the highest in Europe – further contributes to an already dire unemployment situation, as citizens are added to the workforce faster than jobs can be created.

The roots of Kosovo’s current economic woes are numerous and their starting point tragic: there is only so much that can be expected of a post-conflict, landlocked mountainous land without noticeable competitive advantages. Its market is small and its workforce not particularly distinguished. Of all resources, the soil has been blessed with lignite, or soft brown coal, a soon-to-be anachronistic commodity.

Kosovo imports 10 times what it exports. Even the post-Communist silver lining of extensive state-run enterprises has run its course, as few attractive assets remain to be privatized.

The country is “still finding its place in the European economy”, Marek Belka, director of the European department of the IMF, noted recently. Physical proximity does not equate to European-ness: a stone’s throw from Mittel Europe, Kosovo has a per capita GDP hovering around E1,700 a year – somewhere between that of Ghana and Burkina Faso.

Economically most worrisome are the dismal work prospects of the country’s young – well over one in two of whom are out of work. And the better off among them who work for international institutions will have to adapt to lower pay and conditions after their generous bosses are gone.

One might think that the billions of dollars spent on Kosovo would have compensated for some of the disadvantages and spearheaded growth. Shala disagrees, telling Emerging Markets that the vast majority of aid simply did not go into the local economy: “Up to 87% of the donations went to training, technical assistance, and probably ... was pumped back to the countries where the money came from.”

Shala also suggests that while Kosovo’s marginal involvement in international finance shielded it from the direct impact of global financial crisis, the country was nevertheless affected by its broad economic repercussions, lowering the rate of growth from an estimated 6–7% to slightly above 4%.

Exogenous factors aside, the government so far has proved unable to deploy its economic tools effectively. Budgeting is dubious, and spending flies above IMF calls for cautious fiscal policies. The IMF forecasts a fiscal deficit of 7% of GDP (excluding a one-off dividend income event) that “highlights the need for policy action to restore the medium-term sustainability of public finances”. It calls on the authorities to prioritize expenditures and warns of fiscally reckless social initiatives and civil service reforms.

The World Bank is equally nervous, and its directors “stressed the crucial need for Kosovo to reverse its expansionary fiscal stance of 2008-2009... and the importance of strong government commitment to institutional reforms.”

Kosovo’s recent commitment to a $1 billion highway project doesn’t scream fiscal conservativism. While the highway will create an important corridor through Kosovo connecting Albania to Serbia, the public largesse aspect seems to outweigh more practical considerations while taking care of some political needs.

Trade with its natural partner, Serbia, is disrupted as political bickering is put ahead of common development goals. Even though Serbia and Kosovo are signatories of the Central European Free Trade Agreement (Cefta), Kosovo’s exports to Serbia have been stopped on a technicality (although illicit trade flows as freely as ever between the two).

Kosovo’s current play for outside help places a significant wager on the country’s possible membership in the EBRD. Central bank governor Hashim Rexhepi had expected membership to happen soon. “The EBRD is already very active in Kosovo, but membership would allow a more active role in the support of the private sector,” he tells Emerging Markets. Indeed, in January EBRD president Thomas Mirow called the possibility of Kosovo’s membership “an ongoing process given that there are still some EU members that, up to now, have not recognized Kosovo as an independent state”.

Membership is indeed deeply intertwined with diplomatic recognition and is held up largely by Greece and Spain. On this point, Shala is incensed: countries should see EBRD membership only as a vote in favour of development and not a political decision, he says. “Hey, Greece, hey Romania, why are you blocking Kosovo’s entry? Blocking that means blocking development, and blocking development means blocking peace, reconciliation and regional integration,” he says. “Shame on us, Europeans. It’s a joke that Kosovo is a member of the IMF but is not of the EBRD.”

The point is hard to dispute. Prelec, the Crisis Group director, is equally emphatic: “The only thing that can be done by non-recognizers is to inflict additional human suffering on the population of Kosovo, and at some point you have to ask why this is being done.”

Many of Kosovo’s ills are largely indicative of the problems of recent statehood: once you have made a country, you’ve got to run it. “I don’t think much thought was given to that – I think there very seldom is,” says Prelec.

Political adversaries that had found commonality in the fight returned upon independence to bickering about the practicalities of national life. “I was aware of the fact that state building and development would not be easy,” Thaci tells Emerging Markets.

Kosovo is facing a seemingly intractable set of challenges. But hardship is a mainstay of early independence, and resilience is ample. This is no reason to despair, concludes Prelec. “Insurmountable challenges have been surmounted many times by many countries in the world, and I have no doubt that it will be the same for Kosovo.”

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