Kosovo: economic growth does not (yet) create job opportunities

Strong economic growth that does not affect the high unemployment rate, an economic model that must change to meet the challenges of globalisation. Kosovo's economy as seen by Marco Mantovanelli, country manager for the World Bank

While the world’s largest economies like China marked their weakest economic growth since 1990, some small economies from developing countries such as Kosovo are moving at the right pace. According to the January 2019 Global Economic Prospects report, Kosovo is expected to register the highest GDP growth rate (4.5%) in South East Europe in 2019. The report forecasts the same trends for the coming years too. In an interview for OBCT, World Bank manager for Kosovo Marco Mantovanelli explains the main elements of this growing trend as well as the risks and challenges ahead.

Which are the main indicators for the current economic boost in Kosovo?

The current trend is certainly positive news, and it shows that Kosovo is beginning to move away from an economic model that the World Bank deemed as “unstable growth”. In the past, growth was mostly based on household consumption, fuelled by remittances. Now we see growth supported also by an increase in both public and private investments.

Kosovo needs to pursue a strategy to accelerate public, but especially private investments, including Foreign Direct Investments. We need an economy that focuses more on productivity and on increasing its capacity to export. In a landlocked economy like Kosovo, if you don't expand the market you can’t grow by relying only on local consumption. This requires investments, adoption of new technologies and skills. There are some positive developments: last year, growth was not driven only by consumption, but also by investments, which were mostly public, like the expansion of the road and highway network. There is nothing bad with that: spending public money in road construction, for example, is a good return.

But what are the challenges to keep GDP growth at the current fast pace?

One of the risks is that some of the planned investments eventually don’t materialise. Looking at the public sector budget, capital investments tend to be under-implemented, and the savings that this generates in the budget are then used to finance unproductive recurrent expenditure. The World Bank prefers public expenditures to go towards productive investments that generate economic returns. Other internal risks are social spending such as veterans’ benefits, teachers’ benefits, pensions, wages, which may have a fiscal impact. The external risks are obviously Brexit and the general economic performance of the European Union. If the Euro-zone slows down, it has a dampening effect on Kosovo too.

While the GDP growth rate in Kosovo is increasing and is the highest in the region, the same goes for unemployment, which is among the highest in the region – 30.6%. Why do we have such contrasting figures between GDP growth and unemployment rates?

The current economic model was built on a vicious circle, with a private sector that is not dynamic or producing enough jobs. In such an economic environment, the public sector is more attractive to workers than the private one. It is hard for private employers to attract and retain qualified and skilled workers since employment conditions in the public sector are regarded as much better. The main problem is that growth is not generating new jobs due to the limitations in the new private sector. In the private sector, the most efficient generators of new jobs are start-up companies, but there is a problem here. The companies that shed jobs are usually larger and established firms, that gradually adopt new technologies and then become less labour intensive. Start-ups and small and medium-size companies in Kosovo tend to be very small, under eight employees.

Why are start-ups in Kosovo still unable to grow bigger and develop faster?

They are not adopting new technology or innovating and are not able to attract and acquire skills relevant to the new global economy. So, you are not creating “gazelles”, which are companies that grow fast and bring employment fast. In order to grow, companies need to have three things: know-how, skills, and capital. It is difficult to develop know-how in the absence of enough FDI. FDI do not only bring capital to a country but also know-how that hopefully is transferred to local companies. Regarding skills, there is a serious problem here, because according to the World Bank, Kosovo is failing to prepare human resources for the job market. And the third problem is capital: despite the fact that the banking system is capitalised and has liquidity, it is still difficult particularly for start-ups to access financing, so they cannot grow.

How can brain-drain affect the Kosovo economy in the long term?

This is a challenge that every country is currently facing, in particular in South-east Europe. Even in Italy, where I come from, many skilled young people go abroad to find new opportunities. This is certainly a serious issue: the only answer lies in creating conditions for a vibrant private sector. Another measure is to support productivity because companies in Kosovo start small and stay small, they are unable to expand and provide new jobs, so it is normal for people to wish to emigrate. There is no easy solution: Kosovo needs to work to improve both the private and public sector. In many cases, however, young people may benefit from the training received by their employers and then leave the country anyway.

Capital investments help boost the economy, and growth in Kosovo relies mostly on such investments, mainly in infrastructure. One of these investments is the new coal power-plant “Kosova e Re”. Last year, though, then World Bank president Jim Yong Kim stated that the bank won't support its construction. Why?

Rules and guidelines that allow the World Bank to finance coal-based projects are very strict. Namely, we need to demonstrate that there are no other feasible alternatives. Recent developments in renewable technologies and a sharp drop in their costs indicate that those alternatives may exist and that makes it impossible for the World Bank to finance “Kosova e Re”. We understand, however, that the government and a private foreign investor are finalising alternative plans to proceed with the project. From the investment side, it will be a large foreign investment.

According to the Central Bank of Kosovo, Foreign Direct Investments (FDI) suffered a significant decline during 2018. What should the Kosovo government do to attract foreign investors?

There are many reasons for this drop in FDI, including the general perception of the situation in the country, the issues with the electricity supply, bureaucracy issues when it comes to signing contracts etc.. If foreign investments are made in valuable sectors, they create backward links to local suppliers. These foreign investors can also bring in new technologies and improve local companies as well, but this is not happening fast enough. The government can act on different fronts, and some steps are being taken already. Building skills is a must, a long term goal, and not an easy task. Another target is improving the business environment in general. On paper, Kosovo has made a lot of progress on doing business. In practice, however, many obstacles are still in place.