Post - Conflict Economic Reconstruction: The Case of Kosovo

Posted in Europe | 10-Jul-08 | Author: Anže Voh Boštic

The International Institute for Middle-East and Balkan Studies (IFIMES) in Ljubljana, Slovenia, regularly analyses events in the Middle East and the Balkans. Anže Voh Boštic, student from the Faculty of Social Sciences, University of Ljubljana, has analyzed post-conflict reconstruction in Kosovo, with a special emphasis on the role of international community, prior to the Donor’s Conference on Kosovo, which will take place in Brussels on July 11, 2008. His article "POST – CONFLICT ECONOMIC RECONSTRUCTION: THE CASE OF KOSOVO" is published in its entirety.

INTRODUCTION

Because of the globalization and also other factors, today's world is more interconnected than ever. Different countries are, not only in economic sense, heavily dependent on each other, and a destabilization of one country can quickly spill over into the whole region or even into a greater entity. Because of that, efficient post-conflict reconstruction of the country is in present time even more important as it used to be. Even though many authors (e.g. de Soto 2000) argue that countries which are less developed now, let it be because of the historical circumstances or because of the recent conflict in the region, are in the present time going through the same process as developed countries went few centuries ago, it is important to understand that these sometimes very turbulent processes could, because of the strong interconnection of a modern world, have much more devastating effects on the part of or on the whole international community. That is why it is in the interest of the post – conflict country as well as of the international community to stabilize the areas where a future conflict could erupt again, let it be because of the economic, ethnic or other reasons.

Some theories, such as modernization theory, suggests, that developed countries should help the less developed ones so that the less developed countries could learn from more developed ones. Even though some criticize modernization theory, it is suggested that help form outside can contribute to faster development of a country. This supports the assertion that the international community should be actively involved in the development of less developed countries, especially, (because of the arguments stated above) if these countries were recently involved in an armed conflict.

Also, development is hampered from outside pressures, for example with the strongest actors of the international community supporting inept governments in poorer countries because of their own interests, or when developed countries in different international forums are holding the price of let's say primary commodities down and are thus channeling the profits away from the less developed countries and into the developed world. Because of these and of course many other reasons, the countries that are rich with primary commodities, are often very poor in income; e.g. the Democratic Republic of Congo is, by some estimations, among the most, if not the most, rich country in the world, as regards mineral endowment; however, it has the lowest GDP per capita (Purchasing Power Parity) in the world1.

However, the purpose of this argument was not to condemn the international community, but instead to show that international community, because of the reasons stated above and also many others, should be actively involved in the economic development of less developed countries. The aim of this essay is thus to focus on the economic development in the post – conflict areas, and to determine which fields need improvement and how should the various parts if international community help with this process. A newly formed state Kosovo – the country that not so far ago emerged from the conflict – will be used as an example, so the essay will in principle address two questions: which structures need improvement in the country of Kosovo and how to improve them in order to reach sustainable development, and how can the international community and other actors can do to achieve this goal.

Enhanced Porter's diamond2 will be used as a methodological framework for the analysis. The Porter's diamond theory identifies four main fields that are interconnected and determine the position of the country in the world economy. Those fields are factor conditions, related and supporting industries (factors), demand conditions and firm strategy, structure and rivalry. Besides, it also encompasses three supporting fields: government, chance and transnational business activity.

Also, the author believes that, since Kosovo is a post – conflict area, the field „security“ also needs to be included in the analysis.

FACTOR CONDITIONS, RELATED AND SUPPORTING INDUSTRIES, DEMAND CONDITIONS AND FIRM STRATEGY, STRUCTURE AND RIVALRY

Kosovo has two large comparative advantages in the field of factors of production. One is the structure of its population and the other is its mineral reserves. As regards the former, half of Kosovo's 1.9 million of population is under 25 years of age, some 25,000 – 30,000 young people enter labor market every year, and the common opinion among employers is that most of them are willing to work hard, which is of course, because of the local conditions, not hard to understand. This is a vast pool of potential workforce. However, most of them have scarce or no education. This suggests that Kosovo needs to establish efficient educational programmes, so that it could fully use the potential of the young workforce. World Bank has recognized this need for efficient educational programmes and decided that one of the main goals of the World Bank in Kosovo is to improve education programmes in basic schooling as well as at higher levels. In the year 2007, International Development Association (IDA) contributed $10 million grant for the development of educational area3. It is also important that Kosovo tries to bring back its educated migrants. However, without an improvement in living standards and in economic conditions, this will be hard to achieve.

The second comparative advantage of Kosovo, as regards the factors of production, are its vast mineral resources. The study, conducted by British geologists, has shown that Kosovo has substantial amounts of nickel, zinc, lead, cadmium, bauxite, and even small seams of gold. Besides, Kosovo's mineral reserves also include some 14 million tones of lignite that is highly useful for production of electricity. However, the infrastructure, especially mining infrastructure, is obsolete, and besides, the outdated infrastructure is also one of the main reasons for high pollution in Kosovo, which is destroying its natural resources, including such essentials as water. that is why further investment in this sector, especially in mining technology is essential.

As regards supporting factors, health care is very important. The UN report on health care in Kosovo states that, even though considerable improvements have been made in this field, many gaps still remain. Hospitals in Kosovo are still unable to treat such diseases as cancer or conduct any type of cardio surgeries. This is due to the lack of qualified personnel, adequate management of health services, outdated medical equipment and insufficient supply of drugs. It is reckoned that further founding from international community, as well as expertise is needed to overcome this problem4.

Besides the health service, financial sector in Kosovo is also in need of help. The World Bank identified that the key for improving the efficiency and sustainability of the financial sector is the development of the capacity of the Central Bank of Kosovo and other financial institutions. A donor-coordinated programme is needed to improve stability of the sector by strengthening regulatory and supervisory structures. Besides education, World Bank identified improvement of financial sector as its other main goal. In 2008, IDA plans to contribute $ 2 million for the improvement of financial sector.5

Also, transport as well as power infrastructure need to be improved. Kosovo suffers from daily power cuts, which is of course almost intolerable for any serious business. Besides, frequent non-payment of electricity bills causes a great damage to the sector and also to the central budget. However, because of the before mentioned coal reserves in the area, at least supply of electricity can be increased with further investment in mining industry and in thermal plants.

With the average paycheck of 220 Euro per month, and official unemployment as high as 50 %, Kosovo does not have favorable demand conditions. However, these numbers are, because of two reasons, somewhat misleading: there exists an extremely strong field of gray economy, and besides that, large amounts of remittances from migrants are pouring into the region. However, Kosovo should of course try to limit its dependency on remittances and gray economy, and this can be done only with establishing efficient social schemes.

Also, 45 % of population lives below the poverty line, with 15 % in extreme poverty.6 However, poverty is shallow, which means that a lot of inhabitants are just above or below the poverty line, and that suggests that eradicating poverty could be little easier than the figures would suggest. The best way to eradicate poverty is again investment in education, since there is a positive correlation between education and poverty levels7. Also, the development of entrepreneurship, improvement of urban service and infrastructure is needed to lower poverty levels.

Today, it is still very hard to pursue a successful career in entrepreneurship in Kosovo. Taxes are, according to The Economist too high and interest rates on loans are prohibitive8. Of course, the before mentioned financial reform can help with solving this problem. Besides that, there are other factors that impede the progress of entrepreneurship; some of them are embedded in Kosovo's culture, e.g. a belief that says one company – one family. With this kind of ideology, small businesses cannot expand. Cultural beliefs are of course hard to tackle; however, again, proper economic education can teach entrepreneurs to be how to manage business and thus provides for necessary background for the expansion of entrepreneurship in the region.

As regards the legal matters that regulate business activity, Kosovo faces problems because its courts are slow and ineffective, which is coupled with bad and not coherent laws on property rights that impede innovation. More expert staff, coupled with efficient fight against corruption is needed to cope with this problem. Besides, the so-called rule of law needs to be established.

GOVERNMENT, TRANSNATIONAL BUSINESS ACTIVITY, SECURITY AND CHANCE

The most urgent mission, and one of the main goals of EU mission in Kosovo, as regards the field of governance, is the establishment of the rule of law that will, as is the common belief and also supported with some empirical data9, contribute to the economic growth. The EU is in the international community perceived as very efficient in this field. With the mixture of promises (for a possible EU accession later on) and with expert help, it looks well-suited for the task. However, just helping with expertise is not enough. The Kosovars must also adopt and respect the rules, and that is very hard to achieve through top-down processes.10 Instead, education is again the answer on this problem.

Also, the EU has to be careful in the sense that it must not be too assertive in conducting its task, otherwise it risks the development of the so-called dependency syndrome. Dependency syndrome means that government of the state starts to rely on external help in policy making too much, in a sense that it does not want to accept hard decisions, and thus shifts the responsibility for applying these decisions on, in this case, the EU. This has already to some extent occurred in Bosnia, so the EU should to some extent review its strategy.

Kosovo also faces an institutional problem: its institutions are weak and have weak capacity, and that means inefficient public spending and lack of coordination among different departments in the public sector. An institutional reform is thus much needed.

Even though Kosovo is landlocked, has poor transport infrastructure and bad relations with its northern neighbor (Serbia), there are possibilities for its involvement in transnational business activity, especially in the power field. Because of its huge potential in coal and electricity production, Kosovo could become one of the main sources of power for the whole region. However, as mentioned before, this will not be possible without much more investment in this field. Because of vast possibilities in this field Foreign direct investments (FDI) could be attracted, and with that Kosovo could at least lower its dependency on foreign aid.

Of course, hardly any business activity can be conducted in non-secure areas. Kosovo is a post-conflict area, and that means that it would be idealistic to expect that the wounds are completely healed. This is especially visible now when Kosovo proclaimed its sovereignty. However, the appeasement between Serbs and Albanians at least in the medium or long term is far from impossible. James Mayall (1990) states that people endorse nationalistic tensions because they believe that they will, if they abide to nationalism, more easily achieve prosperity. The economic rise could thus soften tensions between the two nations in the long run.

In the short run, bottom up approaches can be applied. For this, NGOs can prove helpful with providing staff, will and much needed expertise. United States Institute of Peace suggested some interesting practices for Bosnia, and they could also be applied here. Among these practices are providing funds for joint ventures, that means ventures in which Albanians as well as Serbs participate, helping the whole community instead of ethnic groups separately, and greater empowerment of local governments. With these practices, community can learn to act as a whole and a civil society can be formed.11

Even though one can determine a lot of factors that determine the economic well-being of a country, a lot is always left to mere chance. However, company or a whole country can learn how to spot chance and how to react on it. Smaller countries have advantage here, because their bureaucracy is smaller, easier to access by entrepreneurs, and more compact and thus information can travel faster between the crucial actors. Kosovo, as a state of only 1,9 million inhabitants suits the standard of smallness; however, because of its inefficient and often corrupt bureaucratic apparatus, the country is in great disadvantage. To improve all this, some of the before mentioned changes have to occur, such as better education of civil servants, better cooperation between Serbs and Albanians and the development of entrepreneurship. One could say that when problems in other fields will be solved, this will also have influence on this field.

KOSOVO AND THE INTERNATIONAL COMMUNITY: EUROPEAN UNION AND INTERNATIONAL AID

As argued in the introduction, international community needs to be actively involved in the reconstruction of Kosovo. After stabilizing the county by NATO, EU is and will be the most active in the area of post-conflict reconstruction.

EU is soon to take charge of running Kosovo from the UNMIK's hands, at least partially. Some of its most urgent tasks were already mentioned, e.g. establishment of the rule of law. However, in order to be successful in Kosovo, EU first has to achieve internal unification of stances. Some countries, e.g. Spain and Cyprus, do not want to recognize Kosovo's statehood and this could be a problem. Also, some EU countries simply do not care about western Balkans much, while others are afraid to tackle with it.

This can be a great setback for the EU. This was recognized by Slovenia, the country that presently holds the presidency of the EU, and it has thus put European perspective for Western Balkans high on the agenda list. Also, at least some institutions of the EU are aware, how important its help is for the regional stability and for the EU as a whole. Also, European security strategy perceives that establishing democracy in the area of Western Balkans can help eliminating transnational crime, and that clearly shows that EU is or should indeed be very interested in stabilizing the region.

Since the year 1999, Kosovo received $3,8 billion of international aid. However, it is of crucial importance to give the aid to those who can efficiently use it. It has to be avoided spending aid on small army of well – paid government „consultants“ that are in most cases inefficient, and instead try to distribute it among smaller entities. A study, conducted by Carol Aldeman12 showed that investment in people and institutions, and supporting foreign entrepreneurship is the most efficient way to spend aid. Otherwise, foreign aid will not increase economic growth of the country. Also, bureaucracy has to be in such condition that it is ready to absorb the aid which means that it has to be efficient and of course not corrupt.

Also, skilled volunteers are often more valuable than money, since they cost much less than government consultants and have stronger impetus. Other ways of efficient aid can be small loans to those who want to start their own business and before mentioned investment in education and health facilities. The main key is involvement of local people as much as possible in the process of rebuilding the country, because they have true interests in achieving progress and are not only interested in profit.

CONCLUSION

Through the analysis, the main challenges of Kosovo were highlighted. The most important among them are education, improvement of health and financial sector, appeasement between Serbs and Albanians, more efficient exploitation of natural resources etc. Also, the main tasks of international community, especially EU were identified and some findings on the efficient use of foreign aid were rendered.

However, Kosovo is far from being the sole country in the world that is in need of this kind of help. With the vast number of civil wars and latent and sometimes not so latent conflicts that rage from Africa to South America, and with current situation in Iraq and Afghanistan, economic reconstruction of the country as a means of peace building will be (and already is) more and more needed.

Even though the analysis was based on the state of Kosovo, other countries that just emerged from conflicts are facing with more or less same problems, and that is why this kind of analysis could also be of much use in those cases. Lack of proper education infrastructure and staff is probably the biggest common denominator in those countries, and probably, so is inefficient government (for whatever reason), poor condition of health and financial area and deep-rooted hatred between ethnic groups. The author hopes that this paper can also provide some useful insight for other post-conflict areas, in a sense that it specifies what needs to be done to make sure that the conflict will never erupt again.

BIBLIOGRAPHY:

Aldeman, Carrol: Foreign aid: Effectively advancing security interests. Enterpreneur.com, Fall 2007. http://www.entrepreneur.com/tradejournals/article/172835092.html (30.3.2008).

Basu Mallick, Oliver (2005) Development Theory: Rostow's Five Stage Model of Development and it's Relevance in Globalization.

http://www.basu-mallick.de/projekte/Oliver_Basu_Mallick_2005_Rostow_and_Globalization.pdf 21.3.2008).

CIA, The World Factbook, Rank Order – GDP – per capita (PPP), https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html (21.3.2008).

The Economist: Mutual Convenience, 13.3.2008, http://www.economist.com/specialreports/displaystory.cfm?story_id=10795773 (13.3.2008).

The Economist: A Ray of light in the dark defile, 27.3.2008. http://www.economist.com/displaystory.cfm?story_id=10919203 (29.3.2008)

The Economist: The world's newest state, 21.2.2008. http://www.economist.com/world/europe/displaystory.cfm?story_id=10727947 (13.3.2008),

The Economist: Why Slovenia is not the Balkans, 20.11.2003. http://www.economist.com/displayStory.cfm?Story_ID=E1_NNDGRSJ (13.3.2008).

The Economist: Kosovo, controversially free at last, 21.2.2008. http://www.economist.com/research/articlesBySubject/displaystory.cfm?subjectid=348882&story_id=10732985 (13.3.2008)

The Economist: Order in the jungle, 13.3.2008. http://www.economist.com/displaystory.cfm?story_id=10849115 (21.3.2008).

European Security Strategy, available at http://www.ena.lu/ (13.3.2008).

IDA (2008) Interim Strategy Note for Kosovo for the Period FY 08.

http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/KOSOVOEXTN/
0,,contentMDK:21645274~isCURL:Y~pagePK:141137~piPK:217854~theSitePK:297770,00.html
(29.3.2008).

International Herald Tribune, 4.3.2008: Ethnic Albanians chart Kosovo path. http://www.iht.com/articles/2008/03/04/europe/kosovo.php?page=1 (29.3.2008).

Mal, Polona, Rus, Tine and Anze Voh Bostic: Post – conflict reconstruction of Bosnia. IFIMES, 12.12.2007. http://www.ifimes.org/default.cfm?Jezik=en&Kat=09&ID=331 (29.3.2008).

Mayall, James (1990) Nationalism and International Society. Cambridge: Cambridge University Press.

Slovenian Presidency of the EU 2008, Programme and Priorities of the Slovenian Presidency, http://www.eu2008.si/en/The_Council_Presidency/Priorities_Programmes/index.html (30.3.2008)

Soto, Hernando de (2000) The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Basic Books.

Svetlicic, Marjan (1996) Svetovno podjetje: izzivi mednarodne proizvodnje. Ljubljana: Znanstveno in publicisticno središce.

United Nations Kosovo Team (2007) Initial Observations on Gaps in Health Care Services in Kosovo. www.sweref.org/mediabank/FileDownload.aspx?ID=3614&file=kosovo_070227.pdf (29.3.2008)

United states Intitute for Peace: NGOs and Peacebuilding in Bosnia's Ethnically Divided Cities June 1998. http://www.usip.org/pubs/specialreports/early/BosniaNGO.html (29.3.2008)

Weitzenegger, http://www.weitzenegger.de/sirmap/diamond.jpg (28.3.2008)

World Bank (2007): Kosovo Signs Financing Agreements with World Bank for two projects: Institutional Development for Education Project and Financial Sector Technical Assistance Project. (News Release). http://siteresources.worldbank.org/INTKOSOVO/Projects%20and%20Operations/21608636/PR_Kosovo_signing_IDEP_FSTAP_12.14.07.pdf (29.3.2008).

Ljubljana, 10 July 2008 International Institute for Middle-East and Balkan Studies (IFIMES) - Ljubljana

Directors:
Bakhtyar Aljaf
Zijad Becirovic, M.Sc.


1 CIA, The World Factbook, Rank Order – GDP – per capita (PPP) ,https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html, (21.3.2008), the Economist: Mutual Convenience, 13.3.2008, http://www.economist.com/specialreports/displaystory.cfm?story_id=1079577 (21.3.2008)

2 For more detailned information on Porter's diamond see Svetlicic 1996

3 World Bank (2007): Kosovo Signs Financing Agreements with World Bank for two projects: Institutional Development for Education Project and Financial Sector Technical Assistance Project. (News Release). http://siteresources.worldbank.org/INTKOSOVO/Projects%20and%20Operations/21608636/PR_Kosovo_signing_IDEP_FSTAP_12.14.07.pdf (29.3.2008)

4 United Nations Kosovo Team (2007) Initial Observations on Gaps in Health Care Services in Kosovo. www.sweref.org/mediabank/FileDownload.aspx?ID=3614&file=kosovo_070227.pdf (29.3.2008)

5 World Bank (2007): Kosovo Signs Financing Agreements with World Bank for two projects: Institutional Development for Education Project and Financial Sector Technical Assistance Project. (News Release). http://siteresources.worldbank.org/INTKOSOVO/Projects%20and%20Operations/21608636/PR_Kosovo_signing_IDEP_FSTAP_12.14.07.pdf (29.3.2008).

6 Ibid.

7 IDA (2008) Interim Strategy Note for Kosovo for the Period FY 08.

http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/
KOSOVOEXTN/0,,contentMDK:21645274~isCURL:Y~pagePK:141137~piPK:217854~theSitePK:297770,00.html

(29.3.2008).

8 The Economist: The world's newest state, 21.2.2008. http://www.economist.com/world/europe/displaystory.cfm?story_id=10727947 (13.3.2008)

9 The Economist describes surveys that show that if a country improve its governance by one standard deviation, the income per head rises by 300 % (see The Economist: Order in the jungle, 13.3.2008. http://www.economist.com/displaystory.cfm?story_id=10849115 (21.3.2008).

10 Some believe that a quick development of Slovenia is due to the fact that Slovenians were used to obey „rules“, because they were historically part of the Habsburg monarchy that was a so-called „Rechtstaat“ a state obeying the rule of law (see The Economist: Why Slovenia is not the Balkans, 20.11.2003. http://www.economist.com/displayStory.cfm?Story_ID=E1_NNDGRSJ (13.3.2008)

11 United states Intitute for Peace: NGOs and Peacebuilding in Bosnia's Ethnically Divided Cities June 1998. http://www.usip.org/pubs/specialreports/early/BosniaNGO.html (29.3.2008)

12 Aldeman, Carrol: Foreign aid: Effectively advancing security interests. Enterpreneur.com, Fall 2007. http://www.entrepreneur.com/tradejournals/article/172835092.html (30.3.2008).

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