The Challenges of Transition in Kosovo

9 June, 2015

Written by:
  • Daniel Linotte
The Challenges of Transition in Kosovo

Fifteen years after separating from Serbia and despite considerable foreign aid, Kosovo is still confronted with serious economic, social and institutional challenges; they include inter alia trade deficits, fiscal problems, the quality of governance, unemployment and poverty. Findings underline the complexity of the liberal and democratic transition, for which much time is required to overcome the legacies of the past and build a new, more unified and richer country.

Kosovo in perspective

Kosovo is a very small country – it has a population of 1.85 million inhabitants, its area is 10,887 sq. km and the official Gross Domestic Product (GDP) reached $7.485 billion in 2014. Considering figures for the per capita GDP and the UNDP Human Development Index (HDI), Kosovo is definitely the poorest country in the Balkans (see Table 1).

The grey economy

The above figures do not take into account the grey economy, which corresponds to unregistered activities. They relate to “survival” jobs and small businesses of poor individuals and families, and subsistence farming. Furthermore, some medium and large companies hire undeclared workers (e.g. for construction work) and are also involved in the smuggling of goods and biased fiscal declarations for fraud purposes.

In Kosovo, the grey economy could employ more than one third of the labor force and represent 40% GDP.

Excessive external imbalances

Considering trade in goods, imports are about nine times larger than exports; Kosovo trade deficit represents more than 40% GDP, a large figure indeed, and there is no improvement overtime. Trade in goods deficits are partly compensated by surpluses for trade in services (with travel as a major sector), remittances from the diaspora and also foreign aid.

Reopening the Trepca Mine

Considering the large trade deficits, the promotion of exports is quite essential, relying on Kosovo’s comparative advantages. During Yugoslav times, mining was a key-activity in the country, and one of the most important mines was the Trepca one. However, the reopening of Trepca mine seems to require a solution for the sharing of property rights between Serbs and Kosovars, and large investments.

Growing budget deficits, corruption and poor governance

Until recently, with budget deficits below 3% GDP, fiscal policy was under strict control. Budgetary discipline is now changing. Following generous pre-electoral promises in 2014 and subsequent 25% increase of public sector wages and social pensions, state expenditures are growing faster than state revenues. Moreover, these expenditures support the construction of the controversial route to Macedonia – nevertheless, as a landlocked country, Kosovo must develop modern transport infrastructures with neighbors, this is essential for promoting exports. The outcome of these changes is a growing budget deficit – it may eventually double and reach 4.7% GDP in 2020.

Impact of corruption on the business climate

In the case of Kosovo, corruption is perceived as very high; it has a strong negative impact on society and is an obstacle for businesses. According to a UN survey, 11.1% of the “general population” of Kosovo paid bribes to officials. For businesses, the corresponding figure is 3.2%. Bribes affect primarily medium and large businesses. Bribes are used mainly to accelerate formalities and procedures and obtain information. Moreover, investment decisions can be cancelled because of the fear of bribes.

Poor governance and lack of competition

Beside corruption, there are cases of poor governance. For instance, the Kosovo Competition Authority (KCA) cannot operate normally since two years because the Members of its Board have not been appointed.

High unemployment and poverty

According to the labour force survey conducted in 2013, the overall unemployment rate reached 28.4%. For males and females, corresponding figures were 44.0% and 12.9% respectively. For the youth (16-24), the unemployment rate was 55%. In addition, average wages are decreasing and reached 422 euros in February 2015, i.e. 21 euros lower than the (all-time) maximum observed in April 2014. Following high unemployment and low wages, 30% of the Kosovar population lives below the poverty line.

Youth illegal immigration, jihad and crime

The high level of youth unemployment creates strong incentives for leaving the country and look for a better future abroad. Thousands of young people left the country recently. In Hungary alone, there were more than 20,000 applications for asylum at the beginning of 2015. A more radical option is joining the jihad and many (between 100 and 200?) young men did it already. Another option is involvement in criminal activities. In that respect, it is worth noting the rise of Albanian mafias over the last decades – a tendency that causes concerns in the West.

In conclusion: the EU perspective

To address transition challenges, Kosovo benefits from assistance provided by the international community, above all the EU and the US. What matters most for the coming years is the effective implementation of the Stabilisation and Association Agreement (SAA) between the EU and Kosovo – it will enter into force in 2016. The SAA represents an institutional anchor that creates commitments and pressures to change the legislation, enforce the Rule of Law and streamline institutions. In addition, there is a firmer resolve in political circles to improve conditions in Kosovo, which allows for pragmatic optimism.

(The views of the author do not represent any official position)

Written by:
  • Daniel Linotte Daniel Linotte holds a PhD in economics from Oxford University. He worked as adviser with international organizations and governments, and held teaching positions at Boston University, the Catholic University Leuven and the European Institute of Public Administration (Maastricht). Since 2008, he is a Senior Member of St. Antony’s College (Oxford). He is presently leading an EU project in the Balkans. He is the author of “The Eurasian Economic Union – Implications for Governance, Democracy and Human Rights”, The Central Asia Caucasus Analyst, publication of the Central Asia-Caucasus Institute & Silk Road Studies Program, a Joint Transatlantic Research and Policy Center affiliated with Johns Hopkins University's Nitze School of Advanced International Studies, Washington DC., and the Institute for Security and Development Policy, Stockholm.
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