9. Overview: Identifying strategic opportunities for Kosovo

Abstract

Kosovo has generated continuous economic growth, improved living standards and made important steps in institution building. Living standards have improved, and life satisfaction is the highest in the region. However, Kosovo’s robust growth performance has not been accompanied by an increase in employment, and Kosovo’s economy needs upgrading from the current consumption-driven, remittance-fuelled model to a more productive and innovative one. This overview presents Kosovo’s strengths and constraints to development and outlines strategic priorities to help Kosovo improve the quality of life of all citizens. These strategic priorities include strengthening education and skills, shifting from the consumption-driven model to a more creative and dynamic economy, building a strong healthcare system and a fair and adequate social protection system, ensuring an adequate and sustainable energy supply and addressing institutional shortcomings.

Kosovo has generated continuous economic growth, improved living standards and made important steps in institution building. Kosovo’s economic growth has been the highest in the Western Balkans, despite a narrow productive base. The creation of formal institutions has been significant, despite remaining challenges. Living standards have improved, and life satisfaction is the highest in the region. Accession to the European Union has become a cornerstone of Kosovo’s foreign policy and a key driver of reforms.

Kosovo must now create the capabilities for continued strong development. The robust growth performance has not been accompanied by an increase in employment, and Kosovo’s economy needs upgrading from the current consumption-driven, remittance-fuelled model to a more productive and innovative one. A strong focus on delivering quality public services will be necessary and require that informal norms and formal institutions coalesce around this objective.

Kosovo is preparing a new National Development Strategy (NDS) for the coming decade. This strategy comes at a crucial time, as the accession process with the EU may be moving to a new level just as Kosovo, Europe and the world grapple with the COVID-19 pandemic and its aftermath. Building on the NDS for 2016-21 (Republic of Kosovo, 2014[1]), the new strategy will have to lay out a vision for Kosovo in 2030, chart the path and key objectives for achieving this vision and tackle the most important constraints that can hold Kosovo back.

The Multi-dimensional Review (MDR) of the Western Balkans supports Kosovo and the region with a strategic perspective and ideas for action on shared challenges. This initial assessment of Kosovo is intended to support the new NDS. It provides a possible vision for Kosovo’s development and identifies the key constraints that must be tackled in order to achieve sustainable and equitable improvements in well-being and economic growth. The next phase of the project will focus on peer learning to find solutions for the challenges that emerge from the initial assessments as shared across the region.

This overview chapter presents the main results. First, the chapter presents inputs for a development vision for Kosovo for 2030, elaborated by participants of a strategic foresight workshop. Second, the chapter takes a bird’s-eye view to assess Kosovo’s development performance on the basis of key statistics on well-being and the Sustainable Development Goals (SDGs) and summarises the key constraints to development identified in this report. It concludes by suggesting key strategic directions for the future. Given the global impact of COVID-19, this overview is followed by a special chapter on the impact of the pandemic in Kosovo. Chapter 11 contains the full assessment of Kosovo along the pillars of sustainable development: People, Prosperity, Partnerships and financing, Peace and institutions, and Planet.

Whenever relevant and subject to data availability, Kosovo is compared with a set of benchmark economies in the region (Albania, Bosnia and Herzegovina, Montenegro, North Macedonia and Serbia), the Organisation for Economic Co-operation and Development (OECD) (Costa Rica, Czech Republic, Greece, Slovak Republic, Slovenia and Turkey), the European Union beyond the OECD (Croatia and Romania) and other regions (Kazakhstan, Morocco, Philippines and Uruguay). Regional averages for the Western Balkans and averages for OECD and EU members serve as additional benchmarks. The selection of benchmark economies is based on historical similarities (including integration into the European Union), economic structures, geographic proximity and mutual partnerships. The selection of non-OECD economies is based on their similar economic and social challenges (such as high migration rates), shared history as transition economies and the relevance of development trajectories that can bring additional perspectives to Kosovo and other Western Balkan economies and provide valuable learning opportunities across selected areas.

This report benefited from close collaboration with the Government of Kosovo, especially the Office for Strategic Planning under the Office of the Prime Minister, and from the collaboration and comments of multiple OECD directorates and the financial and collaborative support of the Swedish International Development Cooperation Agency, which is gratefully acknowledged.

Towards a vision for Kosovo in 2030: strong economic growth and rising living standards contributing to healthier and longer lives built on equal access to quality education, strong human capital, respect for the environment and democratic and effective institutions

A clear vision of the desired future state of Kosovo is an important guidepost for a NDS. A vision for a strategy should provide a description of what Kosovars expect from the economy, society, institutions and the environment, and what the most important elements are in each domain. To generate inputs for such a vision, a workshop entitled Kosovo: Vision and Challenges 2030 was organised in Pristina on 11 March 2020, gathering a broad range of participants from various public-sector ministries and agencies, the private sector, academia and civil society. The vision was built on the basis of simple narratives of the lives of future citizens of Kosovo and subsequent clustering by the five pillars: People, Prosperity, Partnerships and financing, Peace and institutions, and Planet.

The narratives proposed for the vision highlighted aspirations for good quality of life built on access to social protection, decent pensions and health insurance, quality jobs, broad economic opportunity, green growth and strong social capital and cohesion. The narratives of the workshop evoked mainly young and middle-aged women who either are entrepreneurs or have stable quality jobs in tourism and banking. All fictional citizens enjoy middle-class family lives with decent work, financial stability and a rich social life. Citizens travel regularly and have access to a good health system and quality education. Businesses are flourishing and green, and social business models and citizen initiatives are gaining popularity. Other important issues were innovation, jobs for women and youth, Kosovo’s rich environment and integration into the European Union.

The resulting vision centres on equal access to high-quality education, strong gross domestic product (GDP) growth, democratic and effective institutions and respect for the environment through sustainable development. Box 9.1 presents the vision statements for Kosovo in 2030 prepared by participants. Kosovo is envisioned as an economy with strong GDP growth based on improvements in the business environment and the transformation of the economy. Equal access to high-quality education contributes to strong human capital, resulting in higher living standards for Kosovo’s citizens. Effective institutions based on participatory democracy are committed to peace, respect for human rights and socio-economic development. Sustainable development, building on the increased use of renewable energies, the transformation of the urban transport system, a modern waste management system and sustainable water management results in healthier, longer lives. In terms of the individual dimensions of this vision, quality education, strengthened rule of law, health insurance and social protection were considered the most important areas for improvement and levers of sustainable economic development, as identified through a voting exercise (Figure 9.1).

Box 9.1. A development vision for Kosovo in 2030

Kosovo of 2030: strong economic growth and rising living standards contributing to healthier and longer lives built on equal access to quality education, strong human capital, respect for the environment and democratic and effective institutions

As part of the OECD strategic foresight workshop organised in Pristina on 11 March 2020, participants developed a vision statement that reflects the desired future for Kosovo in 2030.

People

Living standards have been enhanced.
Equal access to high-quality education, which promotes equality and respect for diversity, has unlocked human potential and contributed to sustainable development, including improved access to quality health care, insurance, social welfare and protection.

Prosperity, and Partnerships and financing

By 2030, Kosovo has doubled its wealth and reached 50% of the EU average GDP per capita (PPP adjusted) through an average annual GDP growth of 5% to 6%.
This has been achieved by: 1) reducing barriers for businesses and people; 2) improving the business climate through reliable infrastructure, rule of law, healthy competition and European Union-compatible incentives for local and international investment; 3) building partnerships and linkages between economic actors in Kosovo and abroad; and 4) transforming the economy.
As a result, the size of the informal economy has declined from about 26% to 15% of GDP, and unemployment has dropped to 15%.

Peace and institutions

Kosovo has developed democratic and effective institutions to provide equal opportunities to its diverse population and citizens. This reflects a commitment to peace, respect for human rights and socio-economic development.
People and communities have a voice in policy making and support the EU agenda.
A focus on effective design, implementation and monitoring of public policy has created opportunities for growth and greater social integration, which are key conditions for sustainable development.

Planet

Citizens live healthier, longer lives.
Kosovo has significantly reduced coal usage and successfully switched to renewable resources.
Due to sustainable policies and urban mobility plans, citizens use bicycles, public transport and electric vehicles. As a result, there are stricter technical controls for vehicles and improved fuel quality.
Kosovo has attracted recycling companies to invest and create partnerships with municipalities. This has created significant new job opportunities. Citizens have recycling bins near their residences. Illegal landfills have been reduced.
Artificial lakes have been created to reduce water scarcity, and adequate metering has been put in place. Penalties for water misuse are enforced.

Figure 9.1. The most important dimensions of the vision for Kosovo: quality education, strengthened rule of law and the provision of health insurance and social protection

Assessing Kosovo’s development performance

Building on the vision, well-being around the world and sustainable development as benchmarks, this section reviews Kosovo’s development performance. The proposed vision emphasises well-being and sustainable development as the ultimate objectives of development. To assess the well-being of the citizens of Kosovo, the OECD’s Well-being Framework uses a mix of objective and subjective indicators across a range of dimensions that matter to people (OECD, 2020[2]) (Box 9.2). A version adapted to the realities of emerging economies compares Kosovo to the level of well-being outcomes expected, given its level of GDP per capita, across ten dimensions covering material conditions, quality of life and relationships. In a second step, this section assesses Kosovo’s performance across the five pillars of the SDGs, applying distance-to-target measures across selected indicators and building on the analysis in the main body of this report.

Kosovo’s well-being performance is mixed. Citizens of Kosovo feel comparatively safe when walking alone at night and are satisfied with their housing and the road infrastructure. Poverty levels are relatively low and life satisfaction is high, compared to benchmark economies. However, social protection coverage is comparatively low, and social protection expenditure falls short of international comparisons and is not well targeted to those most in need, leaving many poor families unassisted. There are weaknesses in other dimensions of well-being, such as work and job quality, and empowerment vis-à-vis public institutions: the 2019 unemployment rate was 25.7%, and the employment-to-population ratio amounted to 30.1%, one of the lowest in the word. About one in ten Kosovars reported voicing their opinion to a public official in the preceding month in 2019, and 81% perceived government corruption as widespread (Figure 9.2) (Gallup, 2020[3]).

Figure 9.2. Current and expected well-being outcomes for Kosovo: worldwide comparison

Box 9.2. Measuring what matters to people

As part of its broader Better Life Initiative, the OECD first created its Framework for Measuring Well-being in 2011 with the aim of putting people at the heart of policy making. This represented the culmination of longstanding work both inside and outside the organisation. Important strides to “go beyond GDP” had been made with the United Nations Development Programme’s Human Development Index and the work on multi-dimensional poverty by the Oxford Poverty and Human Development Initiative. The framework also draws on rich academic literatures in welfare economics and capability theory, the recommendations of the Commission on the Measurement of Economic Performance and Social Progress (Stiglitz, Sen and Fitoussi, 2009[11]) and existing well-being and sustainable development measurement practice in OECD member and non-member economies. Since its launch, the work on well-being has continuously been updated in line with best practice and continues to be published in the OECD’s How’s Life? report series (OECD, 2020[2]). For the purpose of the MDRs, the OECD Well-being Framework has been adapted to fit the realities of economies at various stages of development (Boarini, Kolev and McGregor, 2014[12]).

The adapted OECD Well-being Framework used in this report focuses on living conditions at the individual, household and community levels that capture how people experience their lives “here and now”. Current well-being here is comprised of ten dimensions related to material conditions that shape people’s economic options (Income, Housing and infrastructure, Work and job quality) and quality-of-life factors that encompass how well people are (and how well they feel they are), what they know and can do and how healthy and safe their places of living are (Health, Knowledge and skills, Environmental quality, Life evaluation, Safety). Quality of life also encompasses people’s connectedness and engagement (Social connections, Empowerment).

Methodological considerations

To capture the full range of people’s actual life experiences, the OECD Well-being Framework uses both objective and subjective indicators. For instance, the Health dimension not only looks at life expectancy estimations but also considers how people feel about their health status and the health services they are receiving. Subjective indicators are sometimes viewed as not being as robust as objective measures; however, there are at least three reasons for considering them alongside the latter to get a holistic picture of well-being. First, there is solid methodological evidence that the subjective measures contained in the well-being framework (e.g. life satisfaction, trust in others and government) are statistically valid and correlate with objective measures of the same construct (OECD, 2013[13]; OECD, 2017[14]). Second, even in cases where perceptions diverge from objective reality, they capture the reality of survey respondents and can drive real-world outcomes, such as voting and lifestyle behaviours (Murtin, Fleischer and Siegerink, 2018[15]). It can actually be especially illuminating for policy makers to zoom in on areas where the gap between citizen perception and objective indicators is largest. Third, many of the measures typically considered objective and routinely used in policy analysis, such as household income, are based on people’s self-reports and can equally be affected by response biases and non-response rates (e.g. of very wealthy households).

There are significant differences in well-being between men and women in Kosovo, and this report finds that there is scope to improve women’s equal participation in society. Women have higher life expectancy, social connections and life satisfaction than men (OECD, 2020[2]) (Figure 9.3). Men do much better in terms of work. There are significant differences in labour market participation between women and men: almost 80% of women were inactive in 2019, one of the highest rates in the world (see the People section in Chapter 11). Despite a solid legal framework for women’s right (Law on Protection from Discrimination) and a dedicated Agency for Gender Equality, discrimination against women in the workplace and poorly developed maternity and parental leave policies financed by employers rather than the public sector remain issues (Jose et al., 2017[16]; European Commission, 2019[17]). Over half of inactive women cite family reasons as the main cause of inactivity, although rates are lower for women with tertiary education, who also show higher overall employment rates (Figure 11.3). The current lack of care leave, flexible working arrangements and limited elderly and childcare facilities act as additional barriers. For example, in 2017/18, only 4% of children aged 0 to 5 attended public preschool education, including kindergartens and nurseries (World Bank, 2017[18]; Thaçi, Rraci and Bajrami, 2018[19]).

The well-being analysis highlights gender differences in terms of safety and empowerment. Men in Kosovo are more likely to feel safe when walking at night in their neighbourhoods (Gallup, 2020[3]). They are also more likely to participate in civic engagement, and they continue to dominate decision making in politics and the private sector: male citizens are much more likely to voice their opinion to an official (Figure 9.3), and only 9% of firms in Kosovo have a female top manager, compared to 17% in the OECD (2020[9]). Although at least one-third of seats in national and municipal assemblies are filled by female MPs, as required by a gender quota (putting Kosovo on par with the OECD average), all national parliamentary groups in the previous legislature were chaired by men, and no local council is currently run by a woman (Halini, 2019[20]).

Figure 9.3. Current and expected well-being outcomes for Kosovo: gender differences

Sustainable development: summary of Kosovo’s performance and key constraints

To serve as guiding tools for action, strategies must identify the problems that stand in the way of the envisaged objectives. Weak implementation has been identified as a key challenge for Kosovo by strategic foresight workshop participants. This is likely due to a strong emphasis in strategies and plans on objectives but a lack of focus on problems to overcome. Strategic objectives not impeded by problems would likely have been achieved already and hence no longer be objectives. At the same time, without defining the problem, it is not possible to evaluate the impact of actions and thereby improve or adjust them during implementation (Rumelt, 2011[21]). To set the basis for future strategy, this section summarises the constraints analysis of this report and presents the key constraints identified for each pillar of sustainable development.

People: Kosovo has been able to raise living standards somewhat over the last decade; however, an extremely low employment rate, regional differences in quality of life and the poor quality of public services related to health, education and social protection remain key challenges. Despite important improvements in poverty reduction, poverty rates in Kosovo remain high and could rise in the aftermath of COVID-19. Large regional differences in income inequality, access to basic infrastructure and quality of life need to be reduced. Minority groups, such as Roma, Ashkali and Egyptians, risk being left behind. At 25.7%, Kosovo’s employment rate remains among the lowest in the world. Unemployment rates are high, particularly for youth and women. Weak labour market institutions and a large supply of workers have resulted in high rates of informality and poor working conditions. The performance of both Kosovo’s health and education systems can be improved. The education system fails to equip people with job-ready skills. Public health expenditure is low, and shortages of medication, health equipment and staff, as well as corruption in the health sector, are major challenges. Kosovo’s social protection expenditure remains low by international comparison, and social protection schemes are not well targeted to those most in need, leaving many poor families unassisted. Gender inequality and persistent societal divisions along ethnic lines remain bottlenecks (Figure 9.4). The People section in Chapter 11 identifies five major challenges to the well-being of Kosovo’s population and a more inclusive development path (Table 9.1).

Figure 9.4. People – progress towards the SDGs in Kosovo

Table 9.1. People – five major constraints to leaving no one behind in Kosovo
1. Regional development is extremely uneven, and many municipalities lack basic infrastructure.
2. Kosovo has one of the highest unemployment rates in the world, including for youth and women, partly fuelled by poor education outcomes and skills mismatches, lack of social care services and difficult regulations to operate businesses.
3. Kosovo’s health system is underfunded and fails to deliver quality results and access to care, and capacity to implement overdue reforms is low.
4. Targeting of social protection does not adequately focus on the most needy and currently disincentivises labour participation.
5. Given the limited integration of ethnic communities, Kosovo’s youth in particular need to be sensitised to issues of transitional justice and dealing with the past.

Prosperity: Kosovo’s economic growth performance has been relatively strong, but a more sustainable economic growth model is needed. Over the past decade, Kosovo has been the fastest growing economy in the Western Balkan region, with average annual GDP growth exceeding 3.5%. However, the relatively robust growth performance has been too dependent on consumption and import growth fuelled by high remittance inflows (amounting to 16% to 20% of Kosovo’s GDP) and has not been supported by investment in production-oriented activities in the tradable sector. While remittances have supported the welfare and living standards of many, they present a major challenge for managing economic transformation. In small open economies similar to Kosovo’s, high levels of remittances tend to drive financial-sector development and push up prices in non-tradeable sectors, including wages and property prices, increasing the costs for producing tradeables (Acosta, Lartey and Mandelman, 2009[26]; Basnet, Donou-Adonsou and Upadhyaya, 2019[27]; Gammage, 2006[28]). This has caused weak export and productivity growth and the stagnation of Kosovo’s narrow productive base. High levels of unemployment and widespread informality persist, encouraging further emigration. Kosovo has significantly improved its business environment, especially the process of starting a business (on this indicator, Kosovo ranks 12th out of 192 economies in the World Bank’s Doing Business ranking). However, the unreliable and insufficient electricity supply remains a significant deterrent for private investment, especially in the manufacturing sector, and a cause of low investment in productive activities. Widespread corruption, lengthy and costly contract enforcement and excessive and costly administrative procedures remain important impediments to private investment as well. The Prosperity section in Chapter 11 identifies three major constraints to a more dynamic economic development path (Table 9.2).

Figure 9.5. Prosperity – progress towards the SDGs in Kosovo

Table 9.2. Prosperity – three major constraints to a more dynamic economy of Kosovo
1. Remittances and redistribution through public-sector employment drive consumption and high reservation wages that outpace productivity growth and inhibit job creation.
2. An unreliable electricity supply discourages investment, particularly in the manufacturing sector.
3. A challenging business environment and weak governance increase the costs of investment and operation in Kosovo.

Partnerships and financing: Kosovo needs to diversify its sources of financing and improve tax revenue mobilisation in order to meet the partnerships-related targets of the United Nations 2030 Agenda for Sustainable Development. Over the past decade, Kosovo’s economy has strongly relied on external financing from the diaspora (remittances and foreign direct investment [FDI]) and relatively high foreign aid inflows. However, these inflows have been declining, and the long-term prospects are weak as a result of migrants’ integration into host countries and falling fertility rates, which translate into a shrinking pool of potential future migrants. Domestic financing and domestic private investment, particularly in production- and export-oriented activities, need to be mobilised. Kosovo’s tax revenues are low by international comparison due to low tax rates, tax exemptions, a large informal sector and significant tax evasion (Figure 9.6). Increased government current spending, most importantly on wages and social security benefits, has crowded out public investment. Spending on education, health and social protection remains low. Kosovo needs to increase tax revenues and to redirect expenditures towards productivity and growth-enhancing public investments. Despite the economy’s sound and well-developed financial sector and strong credit growth over the past decade, supported by declining interest rates and non-performing loans (NPLs), access to financing remains an important constraint to private investment, especially for small and medium-sized enterprises (SMEs). The Partnerships and financing section in Chapter 11 identifies four major challenges to more sustainable financing of Kosovo’s development (Figure 9.6).

Figure 9.6. Partnerships and financing – progress towards the SDGs in Kosovo

Table 9.3. Partnerships and financing – four major constraints to financing development in Kosovo
1. Kosovo’s economy lacks diversified financing for investment and growth.
2. Revenue performance has been weak on account of the low tax rates, limited tax base and inefficient tax collection.
3. Government current expenditures have crowded out investment in priority areas for development.
4. Access to finance is constrained, particularly for SMEs.

Peace and institutions: Kosovo has made remarkable advancements by successfully building a new state from scratch and designing its own executive, legislative and judiciary powers. However, the prevalence of informal institutions, low trust in formal institutions and ethnic tensions remain important challenges. The large size of Kosovo’s public administration fragments the central government and reduces accountability and effectiveness in executing public policy. The low fiscal capacity of local governments, in combination with intergovernmental grants to municipalities, create incentives for patronage, raising public-sector employment at the local level. This results in high levels of local public spending on employee compensation but low levels of investment in local public goods. The judicial system is biased and inefficient, since financial and human resources are lacking, judges lack impartiality and, bribery and gift giving are widespread. Citizens therefore often resort to informal mechanisms to resolve disputes (Figure 9.7). Publicly owned enterprises (POEs) play a significant role in Kosovo’s economy, but despite several reforms and privatisation initiatives, their performance remains poor. Land and property ownership is still largely ruled by ancient social customs and norms rather than formal legislation. Complete land registries and secure land rights could boost agricultural productivity, facilitate law enforcement and anti-corruption efforts and improve access to credit, thereby encouraging long-term investments. Despite improvements in statistical capacity since 2013, a lack of human and financial resources and institutional and organisational inefficiencies impede the Kosovo Agency of Statistics (KAS) from producing high-quality statistical products. The Peace and institutions section in Chapter 11 identifies six key priorities to improve the institutional setting in Kosovo (Table 9.4).

Figure 9.7. Peace and institutions – progress towards the SDGs in Kosovo

Table 9.4. Peace and institutions – six major constraints to enhancing the quality of institutions in Kosovo
1. An overly complicated structure and political interference may undermine the effectiveness of the public administration.
2. The current form of decentralisation creates incentives for patronage instead of spending on public goods.
3. The judicial system is formally strong but remains inefficient and too exposed to interference.
4. Lack of accountability and financial mismanagement in POEs may undermine macroeconomic stability.
5. Property rights remain insecure, mainly due to faulty registration procedures and lack of awareness about existing laws.
6. Shortage of human resources and insufficient methodological standards impede the quality of statistical products.

Planet: Kosovo needs to improve the management of natural resources, step up environmental protection, diversify its energy supply and raise energy efficiency in order to make its economic development more sustainable. Kosovo’s rich ecosystem and biodiversity are threatened. Forest covered 45% of the total land area in 2012, but forest degradation is a major challenge. Kosovo’s rich mineral resources are not sustainably managed, and mining sites cause environmental and social problems. Water is scarce in Kosovo by regional and international standards. Kosovo does not have wastewater treatment, and access to water is not universal in rural areas. The annual cost of environmental degradation is high, and high levels of air pollution, limited solid waste collection and mismanagement of the scarce water resources are major hindrances to the population’s well-being and Kosovo’s economic development. Environmental protection needs to be stepped up in Kosovo. At present, the enforcement and implementation of environmental legislation is weak. Kosovo’s energy supply is unreliable in some parts of the economy, the energy market lacks competition, and energy production is inefficient and lacking diversification: Kosovo is highly dependent on coal as the primary source of electricity. Except for hydropower, renewable sources are very low in Kosovo’s energy mix (Figure 9.8). Kosovo’s energy intensity is high. Due to old electricity distribution networks, electric power transmission and distribution losses are high. These energy-sector challenges make access to electricity a major obstacle to private investment. The Planet section in Chapter 11 identifies three key constraints to a more sustainable development path (Table 9.5).

Figure 9.8. Planet – progress towards the SDGs in Kosovo

Table 9.5. Planet – three major constraints to a more sustainable path in Kosovo
1. Mismanagement of natural resources is a challenge for sustainable development.
2. Poor environmental quality affects people’s well-being.
3. The energy supply is unsustainable, insufficiently diverse and inefficient.

Suggestions for strategic priorities for Kosovo

A development strategy for Kosovo should set the path for achieving a vision for Kosovo’s future, address the most important constraints and build on opportunities. The inputs for a vision and the key constraints presented above can serve as a basis for setting strategic priorities. The objectives of the vision statement must be paired with corresponding obstacles and pathways to building implementation capacities and political support. The strategic priorities identified build on other assessments in Kosovo, including the 2016-21 NDS of Kosovo (Government of Kosovo, 2016[38]), OECD assessments (OECD, 2018[39]) and European Commission assessments (European Commission, 2019[40]; European Commission, 2019[41]), and aim to bring the key constraints together in a holistic manner.

The COVID-19 crisis hit Kosovo hard but also offers the opportunity for strategic focus. Kosovo has dealt well with the health crisis so far and been able to limit casualties and spread. Like most economies in Europe, however, Kosovo will suffer a recession in 2020. In response to the crisis, Kosovo will have to invest in a swift recovery. Investments and possible international support present an opportunity for strategic focus on structural reforms and removing identified constraints.

Skills and education emerged as the top strategic priority, constituting both a key constraint and an opportunity. According to the vision proposals developed in the strategic foresight workshop, citizens desire equal access to high-quality education that promotes equality and respect for diversity and can unlock people’s potential. The constraints analysis of the people and prosperity dimensions highlighted as key constraints deep insufficiencies in the current skills base and skills system. Enabling Kosovars to make the most of their potential should be a strategic objective for both greater well-being and a stronger economy.

Shifting from a consumption-driven model to a more creative and dynamic economy driven by capabilities offers huge opportunities and must be a strategic priority. The constraints analysis and the visioning workshop highlighted citizens’ desire for economic growth based on the development of innovative, green and social businesses and on a reduction of informality. Kosovo’s current economic model relies heavily on remittances, which have allowed for significant improvements in living standards, poverty alleviation and financial, construction and travel services. They have also created imbalances, such as high reservation wages that contribute to uncompetitive export sectors. The future strategy must focus on capabilities, effective public services and rapid upskilling of the workforce to make up for these imbalances, generate more home-grown opportunities and create jobs. Several niches in metal-based manufacturing and information services look promising but need a more conducive environment. Capabilities will require strategic attraction of FDI and development of competences.

Building a strong healthcare system and a fair and adequate social protection system is an opportunity to boost quality of life and resilience in Kosovo, especially in light of the current COVID-19 crisis. During the visioning workshop, citizens expressed a strong desire for higher living standards, including inclusive, quality and affordable health care and adequate and accessible social protection. Strengthening Kosovo’s healthcare system is an opportunity to improve the health of Kosovo’s population, raise life expectancy and reduce infant mortality. Better and fairer access to social protection will reduce poverty and inequalities. Kosovo’s healthcare system will require substantial investments in infrastructure and equipment and must continue progressing towards universal access. Kosovo should improve the coverage, benefit levels and design of social assistance to ensure equity and social cohesion. Last, special attention must be given to allowing women to participate fully as citizens and professionals in the labour market on an equal footing and with the same opportunities as men.

Ensuring an adequate and sustainable energy supply is an opportunity to attract more investment in productive activities and to improve quality of life. The vision highlighted Kosovars’ desire for sustainable development, in particular through a reliable and clean energy supply, which also results in healthier, longer lives. The constraints analysis of the planet and prosperity dimensions showed that Kosovo’s unreliable and inadequate energy supply is a key obstacle to private investment in manufacturing and a major source of pollution and carbon dioxide (CO₂) emissions. Building a reliable and adequate energy system is key to attracting more private investment in productive activities and to enhancing environmental quality. Improving energy efficiency, phasing out highly polluting coal power plants, increasing the share of renewables in the electricity mix and modernising electricity transmission and distribution networks should be among the government’s strategic priorities.

Institution and government shortcomings emerged as a transversal constraint and key obstacle that Kosovo’s future strategy must tackle. Citizens express a strong desire for effective institutions based on participatory democracy, a commitment to peace, respect for human rights, and socio-economic development. However, the constraints analysis of the peace and institutions dimension showed that the prevalence of informal institutions, low trust in formal institutions and ethnic tensions remain important challenges. Widespread corruption and patronage in the public administration needs to be addressed, and the judicial system, the land and property ownership system and statistical capacity need to be improved. Developing efficient and impartial institutions must be at the core of Kosovo’s strategic objectives in order to strengthen citizens’ and businesses’ trust in the government. Effective and well-functioning institutions are the basis for sustainable economic development and are a transversal challenge across all five dimensions of the constraints analysis.

The process of integration with the European Union is one of the key assets and strategic opportunities for Kosovo’s development. The importance of EU accession for Kosovo is clearly stated in key policy documents, such as Kosovo’s successive economic reform programmes (ERPs). Over the last decades, the EU integration process provided Kosovo with large financial and technical support for its development (Box 9.3). It continues to be an important lever to address some of the identified constraints and to foster regional co-operation.

Addressing institutional shortcomings and strengthening the government’s implementation capability will have significant positive effects across Kosovo’s strategic objectives. For example, stronger and more effective local governments are key to establishing and improving quality assurance processes at the school level and improving curricula and teaching skills, thereby strengthening the education system and human capital, Kosovo’s top strategic priority. An improved business environment and higher levels of trust in the government based on effective quality institutions are key for the second strategic priority: transitioning to a more sustainable model of economic growth based on private investment in local production and innovation. Health care and social protection need both stronger local governments and more revenue. To address these key strategic priorities, it is essential to streamline the administration, focus on effectiveness and improve multilevel governance.

Box 9.3. Kosovo’s integration towards the European Union

The process towards integration towards the European Union has been an important driver of democratisation and institution building in Kosovo and has provided the economy with large financial and technical support for its development and regional integration. As part of the process, Kosovo has worked to bring its legislation in line with the existing body of EU laws and standards (known as the acquis). The Kosovo authorities continue to demonstrate publicly their commitment to advancing on the economy’s European path (European Commission, 2020[42]).

Through the Stabilisation and Association Process (SAP) since 1999, Kosovo and the economies in the region have been involved in a progressive partnership with the European Union. The SAP rests on the following pillars: bilateral Stabilisation and Association Agreements; trade relations (wide-ranging trade agreements); financial assistance (the Instrument for Pre-accession Assistance [IPA]); and regional co-operation, such as the Central European Free Trade Agreement (CEFTA):

The Stabilisation and Association Agreement with Kosovo, which entered into force on 1 April 2016, governs the relations between Kosovo and the European Union. In July 2018, the European Commission confirmed that Kosovo has fulfilled all visa liberalisation benchmarks. While the European Parliament confirmed its support for the Commission’s proposal for visa liberalisation, the proposal is currently pending in the European Council (European Commission, 2020[42]).
The IPA has been instrumental in providing Kosovo with assistance in reforms through financial and technical help. IPA II (for 2014-20) accounted for 9.2% of GDP in Kosovo (EUR 602.2 million) (Figure 9.9 – Panel A), making Kosovo recipient of the fourth largest IPA in the Western Balkans in terms of share of GDP. Most of the IPA II funds in the period (28.1%, or about EUR 169.4 million) have been allocated to strengthening democracy and governance. A significant share went to environment, climate action and energy (Figure 9.9 – Panel B).

Figure 9.9. IPA II funding has been concentrated on democracy and governance, and environment, climate action and energy

Regional co-operation has been another important driver in the SAP for developing infrastructure and networks in the region and establishing a free trade area between Kosovo and other economies. Key regional initiatives include the CEFTA, the Energy Community, the Western Balkans Investment Framework and the Regional Cooperation Council. The CEFTA, an international trade agreement among economies in South East Europe, was one of the means of facilitating trade in the region and harmonising trade-related legislation with the European Union. The share of exports of goods and services from Kosovo to CEFTA economies in the Western Balkans increased from 1.4% in 2012 to 11.2% in 2019. About 50% of Kosovo’s overall exports went to Albania (Figure 9.10) (CEFTA, 2020[44]).

Figure 9.10. The role of the CEFTA in Kosovo

The new Enlargement Package and the adoption of the Economic and Investment Plan have set new directions for EU integration and recovery from COVID-19. Building on the Western Balkan strategy from 2018 (European Commission, 2018[45]), the Enlargement Package adopted on 6 October 2020 stresses the need to improve the EU integration process to be better equipped to deal with structural weaknesses in Kosovo and other Western Balkan economies. In parallel, the European Commission adopted the Economic and Investment Plan to spur the long-term economic recovery of Kosovo and the region, support a green and digital transition, and foster regional integration and convergence with the European Union. The support is crucial, especially in light of both the COVID-19 impact and the existing challenges, such as weak competitiveness and high unemployment. The plan will mobilise up to EUR 9 billion of IPA III funding for 2021-27. A large majority of this support will be directed towards key productive investments and sustainable infrastructure in the Western Balkans through ten flagship initiatives. Through the Western Balkans Guarantee facility, the ambition is to raise additional investments of up to EUR 20 billion (European Commission, 2020[46]; European Commission, 2020[47]).

Note: A first set of projects is articulated around ten flagship investment initiatives, including investments in transport infrastructure projects (connecting east to west and north to south), renewable energy, transition from coal, connecting coastal regions, building renovations, waste and water management, digital infrastructure, supporting the competitiveness of the private sector, and youth support.

Source: European Commission (2020[42]; 2020[46]; 2020[47]; 2018[45]); (CEFTA, 2020[44]).

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