No. 9 : September-December 2013

James Korovilas

Kosovo’s Economy

Academic Foresights

How do you analyze the present situation of Kosovo’s economy?

Kosovo is Europe’s newest state, officially declaring its independence from Serbia in 2008. Despite the fact that Kosovo’s political status as an independent state remains controversial, the economy of Kosovo is never the less able to function with almost complete independence from the Republic of Serbia. Furthermore, Kosovo’s economic performance over the last few years has been relatively impressive, with sustained rates of economic growth throughout the troubled years of global financial crisis and the European sovereign debt crisis. This is not suggest that Kosovo has also achieved a sustained level of economic development, but simply to suggest that the economy of Kosovo has been relatively immune from the international economic turbulence which has impacted so negatively upon the economies of southern Europe. For example, Kosovo still remains one of the poorest countries in Europe, with high levels of income inequality and inadequate provision of public services.

There are a number of possible explanations for how Kosovo has managed to avoid the effects of the various rounds of international economic turmoil of the last few years. At the macroeconomic level, Kosovo’s economic stability can partly be explained by the use of the Euro as the national currency. This of course provides Kosovo with monetary stability and also ensures that inflation levels are at a minimum. Kosovo’s informal membership of the Euro has further benefits in terms of encouraging international trade and helping to facilitate the inflow of international investment. The legacy of Kosovo’s international administration (UNMIK) can also be cited as part of the explanation for the relative stability of the economy. The international administration, mainly in the form of the United Nations Mission in Kosovo (UNMIK), was charged with the task of establishing a new set of state structures and institutions in the aftermath of the Kosovo conflict in 1999. These new state institutions were established in accordance with the principle of trying to create an effective free market liberal democracy. Whilst the appropriateness of the political and economic model imposed on Kosovo has remained the subject of continuous academic debate, there are however clear economic benefits associated with the formation of credible and effective economic institutions. For example, the effectiveness of the central bank, the fiscal framework and the legal framework, whilst questionable by northern European standards, are nevertheless highly effective in comparison to other small economies in the western Balkans. Finally on this point, there is the fact that Kosovo’s economic framework was designed to operate on a balanced domestic and international budget. Therefore, in the absence of any significant internal or international debts, Kosovo was therefore not vulnerable to the fallout from the European sovereign debt crisis.

These positive perspectives on the present state of Kosovo’s economy need to be understood in conjunction with a number of distortions in Kosovo’s post war economy. Kosovo’s use of the Euro, together with its relative openness to international trade, has created a situation where the economy has become highly dependent upon the importation of goods, with very little domestic production to meet domestic demand for traded goods. This high level of import dependence has resulted in a structural current account deficit on Kosovo’s balance of payments, with the value of total imports vastly exceeding the value of total exports. Since Kosovo has the Euro as its national currency, there is no opportunity for a devaluation of the domestic currency in order to correct this structural current account deficit. It stands to reason that long term structural current account deficits are invariably offset by some counter flow of money, whether it be investment flows, debt financing, remittances, or even international aid. In the case of Kosovo, the main explanation for how the economy is able to sustain such a large current account deficit is through the investment and remittance flows from the Kosovo Albanian diaspora.

If we consider the levels of economic growth in Kosovo over the last eight years, the figures clearly demonstrate that there has been a steady increase in total economic output over this time period, despite the possible negative impact of the global financial crisis and the European sovereign debt crisis. As for total remittances entering Kosovo, here we also see a steady increase in the total flow of remittances over this same time period. These figures demonstrate a number of important facts about Kosovo’s economy: Firstly, economic growth since 2006 has not been particularly sensitive to by the international economic turmoil which has affected other European economies. Secondly, the flow of remittances into Kosovo is also not sensitive to the impact of the international economic turmoil. Thirdly, despite the fact that the flow of remittances into Kosovo has experienced a steady increase over this time period, the size of these flows has decreased as a proportion of Kosovo’s GDP. This could be taken as an indication that remittances are becoming increasingly less significant as the economy of Kosovo expands. Alternatively, it could also be the case that the flow of money from the Kosovo Albanian diaspora has increasingly shifted away ‘standard remittances’ and towards other types of investment flows. For example, the growth of Kosovo’s economy is partly based on the strength of the construction and real estate sector, which in turn is fuelled by ‘investment flows’ from the Kosovo Albanian diaspora. Whilst these types of ‘investment flows’ are not quite the same as ‘standard’ remittances, they do however contain several key similarities with standard remittances. For example, remittances are usually defined as transfers of money which are distinct from investments in the sense that they are ‘irretrievable’. Essentially, money sent as remittances cannot simply be recalled by the sender, whilst in theory money sent as an investment can be recalled by the investor.

This distinction between remittances and investments raises some important questions for Kosovo. For example, Kosovo Albanians living abroad may invest money in property in Kosovo. However, if it is the case that they would never consider selling this property and withdrawing their investment, then this investment in Kosovo contains the element of ‘irretrievability’ which would imply that it is in fact similar to a remittance flow. The point here is that the economy of Kosovo continues to be sustained by the flow of either standard remittances, or ‘investment remittances’ from the Kosovo Albanian diaspora. Indeed, Kosovo has become both an import dependent and a remittance dependent economy.

In your opinion, how will the situation likely evolve over the next five years?

Kosovo, together with the other countries of the western Bakans, has a long term ambition of joining the European Union. Kosovo’s enthusiasm for joining the European Union has not been undermined by the recent economic difficulties faced by the European Union’s southern member states. These is little doubt that these ‘difficulties’, including unsustainable levels of public debt, crippling levels of unemployment and economic shrinkage, are a direct consequence of the economic distortions which have resulted from their membership of the single currency. However, despite the difficulties faced by other EU member states, opinion within Kosovo remains strongly in favour of joining the European Union for two main reasons: Firstly, as previously mentioned, there is the argument that Kosovo’s economy is fiscally sustainable and is not being fuelled by debt. Therefore, the risks associated with Euro membership, such as cheap government borrowing and fixed exchange rates, are not so critical for Kosovo. Secondly, there is the argument that EU membership, whilst presenting a range of economic risks, also contains a range of advantages which outweigh these risks. For example, EU membership would offer the opportunity of unrestricted foreign travel. This would be a huge improvement on the current situation faced by Kosovo’s citizens, who currently require visas in order to enter most European countries and are actually prevented from entering certain countries which have chosen not to recognise Kosovo as an independent state. The allure of unrestricted foreign travel should not be underestimated, especially since Kosovo’s citizens are often forced to travel abroad in order to secure employment.

Whether Kosovo would be able to secure EU membership within the next five years is unclear. However, there would be huge implications for the economy of Kosovo should they be able to secure unrestricted access to the countries of the European Union, especially in terms of economic migration, remittances and other forms of investments in Kosovo.

What are the structural long-term perspectives?

The main issue to be considered here is whether the economy of Kosovo will continue in the longer term to be characterised by import dependency, remittance dependency, an underdeveloped traded goods sector and an over reliance on the construction and real estate sector. There are a number of different scenarios for Kosovo’s long term economic future:

Firstly, there is the possibility that Kosovo will remain a ‘dependent’ economy, with continued reliance upon the core European economies to provide employment, money and goods. In this scenario, it is not the case that the persistence of long term ‘dependency’ is necessarily a bad outcome in terms of the development of Kosovo’s economy. As a small economy within Europe, Kosovo should be expected to experience a high level of international ‘connectedness’. Whether or not this high level of connectedness should be seen as a problem is largely a question of whether the long term development of Kosovo’s economy and society is restricted by any negative effects. Indeed, if it were the case that Kosovo’s long term development was restricted, this would imply that ‘connectedness’ should in fact be seen as a form of ‘dependency’. There are a number of factors which might determine the extent to which Kosovo’s development model could be seen as promoting a form of harmless ‘connectedness’, or alternatively a form of anti-developmental ‘dependency’. For example, should it be the case that levels of income inequality rise significantly over time as the economy develops, then it could be argued that Kosovo is experiencing a form of ‘dependency’ with the benefits of economic development being unequally distributed. However, it is unlikely that the most extreme effects of long term economic dependency will be felt in Kosovo. International migration, together with the associated benefit of securing a source of ‘good money’, is in theory an opportunity which is available to most of Kosovo’s working age population. Therefore, this would limit the extent to which Kosovo’s long term economic dependency could result in a form of anti-development characterised by excessive levels of income inequality.

Secondly, there is the possibly that Kosovo’s access to money from the diaspora will only last for as long as the Kosovo Albanian diaspora remain ‘remittance active’. If we assume that each migrant will only remain remittance active for a finite number of years and we also assume that the flow of new migrants into the diaspora is limited by the imposition of tight immigration restrictions in the main countries of the Kosovo Albanian diaspora (Germany & Switzerland), then we might conclude that remittances and investment money from the diaspora will decline over time. Should this scenario be accurate, it would imply that Kosovo will be forced to adapt to a future without the helping hand of diaspora money. Should this scenario unfold, the implications are that Kosovo will be forced to become a more self sustaining economy, with greater emphasis on domestic production and reduced emphasis on the retail and construction sectors. On the question of whether this type of economic adjustment would be painful, this is mainly a determined by the time scale. For example, in the event that the flow of new migrants into the diaspora was completely cut, this would eventually result in a significant shock to the economy of Kosovo. However, this extreme scenario is unlikely to unfold, since despite the best efforts of the German and Swiss governments, economic migration between Kosovo and these two countries remains a possibility, with migration through marriage as one of the main legitimate routes out of Kosovo. Indeed, the flow of remittances entering Kosovo has defied the predictions of the remittance pessimists, with a steady increase in the total flow over the last few years.

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James Korovilas is a senior lecturer and researcher at the University of the West of England, Bristol. His academic interests are mainly in the field of economic development, with particular emphasis upon the countries of the western Balkans, and especially the economic development of post conflict Kosovo.

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