Kosovo cannot have a stable future without sustainable economic development.  This report considers the task of promoting such development. After surveying the present state of the economy, it assesses the international efforts so far to lay the groundwork for future prosperity. It also considers the prospects for the former socially owned sector, including plans for privatisation and prospects for restructuring and investment.

Post-war reconstruction after the Yugoslav Army campaigns and NATO bombardment is only part of the challenge facing the international administration. Much of Kosovo’s industry, long plagued by mismanagement and starved of investment, had become decrepit and would in any case have been unsalvageable.

As the official economy declined and repression increased in the 1990s, the grey economy was the only economic space – apart from subsistence agriculture – open to most Albanians. Together with remittances from relatives working abroad, this was how people survived. Thanks to the ‘parallel system’, Albanian entrepreneurship was well developed before the conflict of 1998-99, and quickly took advantage of the removal of Serbian domination in June 1999.

However, the remarkable boom in construction and trade since 1999 has evident limitations.  It cannot compensate for the economy’s structural problems. A significant proportion of the population continues to live in poverty.  The reliance on émigré remittances and donor aid reveals the lack of domestic capacity in Kosovo's economy.

UNMIK’s initial economic priorities were to re-establish the provision of basic goods and services, set up a minimal welfare net, and rehabilitate utilities. There has been reasonable success with the first of these priorities, and other notable achievements as well.

Business registration has been more successful than was expected. A sound legal framework for commercial activities is being put in place. The Customs Service has turned into a star performer in terms of generating revenue for Kosovo, thanks to strong international and local cooperation in training and implementing customs regulations.

Progress with the utilities, on the other hand, has been disappointing.  To retain credibility, the international community needs to start delivering, especially in energy, telecommunications, water and roads. Communications to surrounding states are poor, and must be improved if economic growth and regional integration are to occur.

The international administration also needs to tackle the urgent structural problems facing Kosovo’s industrial sector. There are potential opportunities for vertical integration in both agro-industry and manufacturing, which have 100 or so viable socially owned enterprises. To start developing the necessary competitive conditions, UNMIK’s Department of Trade and Industry, together with UN lawyers in Pristina and New York, should establish the necessary mechanisms through privatisation, creative commercialisation, spin-offs or other means of making assets more liquid.

These economic issues also have a directly political dimension, one that affects all aspects of structural and institutional development in Kosovo. Potential investors have been deterred by the fact that they do not know which jurisdiction will finally apply. They need to have confidence that a future change in political status would not put their investment in question or fundamentally alter the environment where they would be doing business. Controversies over ownership have a similar deterrent effect.

Therefore UNMIK should press ahead with privatisation, addressing questions of property rights as they arise. It should guarantee potential investors that any final status settlement will include acceptance by the ultimate sovereign of privatisation decisions taken, and corresponding rights acquired, under international administration.

This step is both urgently needed and appropriate, given that UNMIK has restricted the competencies Kosovo’s self-government institutions – now being set up after the November 2001 elections – to exclude crucial areas of economic decision-making.

Ways also have to be found to mitigate the impact of criminality.  Law enforcement must be more effective, and the failings of the criminal justice system must be addressed. It must be easier as well as more profitable to act legally than illegally. Measures to increase confidence in the legal system should be implemented, such as witness and victim protection schemes, allied to a public information campaign on the damage done to society by the illegal extortion of taxes.

Kosovo’s Serb population is as isolated economically as in other respects. Yet, despite the continuing mutual fear and suspicion, some contacts do take place around Serb enclaves. Fostering commercial contacts between Serbs and Albanians is not only vital in reducing the poverty and economic isolation of Kosovo Serbs.  In a modest yet important way, progress of this kind in breaking down barriers between Serbs and Albanians could make a valuable contribution to addressing the broader problem of providing a safe and secure environment for a multi-ethnic society.

This report argues, in sum that there is definite scope for economic progress if the environment for privatisation, investment and restructuring can be freed up; if corruption and crime can be curtailed and education improved; if Kosovo’s relations with its neighbours can be normalised, and the economy integrated into the region; if UNMIK can find the nerve to forge ahead with privatisation; and if the key outstanding political issue of final status can be addressed.

Pristina/Brussels, 19 December 2001