Economic and Social Reforms for Peace and Reconciliation

Prepared by the World Bank

February 1, 2001

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This report contains a discussion of the principal economic and social reform policy tasks facing Kosovo in the aftermath of a lost decade of civic exclusion of its majority ethnic population and of disinvestment and neglect of both physical and human capital – a period that culminated in the seventy-eight day conflict of spring 1999. It is intended to present ideas to the interim civil administration of Kosovo led by the United Nations (UNMIK), to the joint political and administrative structures, involving representatives of the local population, that are embedded within UNMIK and, perhaps most of all, to Kosovo society as a whole. The overall objective is taken to be the consolidation of peace, the fostering of social reconciliation between the peoples of Kosovo, and the initiation of sustainable, self-propelling growth in the economy of the province.

The key reform areas in the sphere of economic policy are considered to be:

• The formulation of a sustainable budget that is increasingly financed through local taxation and user fees and, therefore, with reduced reliance on external donor support as well as the development of fiscal institutions ensuring the efficiency and probity of public spending;

• The establishment of a liberal trade and customs regime that permits Kosovo to realize its potential for growth and exports in the context of its geographical location in the south-central Balkans as well as taking advantage of the enabling arrangements being fostered by the Stability Pact and the European Union;

• The use of a hard currency for internal transactions and savings together with the development of a sound banking system subject to strict supervision; and

• The creation of a reformed framework for encouraging the growth of private, small and medium enterprises and transferring viable existing public enterprises into private hands.

These reforms will enable Kosovo to create the conditions for durable growth under efficient market conditions. Fiscal discipline would be maintained through balanced budgets and the provision of essential public services, a low inflation environment safeguarded through the use of the deutsche mark, savings encouraged by a safe banking system, and the transition to a private market economy assisted through the incentives of trade, the forces of competition, and the adoption of a suitable legal and regulatory framework for enterprise formation. But three aspects of the social policy agenda deserve attention.

• Critical to addressing the denuding of human capital and loss of technical skills among the population is education policy and institutions. The basis for near-term prosperity can be laid only with a work force educated to standards not below those in competitor countries.

• Moreover, the neglect of health services and policies over the past decade and the need to catch up as well as address the effects of recent social traumas places health policy as a key agenda item in social reforms.

• Finally, Kosovo ought to develop a financeable, sustainable system of social protection for its vulnerable elements of the population to replace the ad hoc humanitarian interventions of the past decade.

These three areas of social policy reforms, discussed in the report, also constitute the major expenditure categories in the budget, accounting for nearly three-quarters of total spending.

The report is organized as follows: the first volume provides some economic background (with the absence of data over the last dozen years being a major limiting factor to analysis) and then proceeds to a discussion of the key aspects of the political economy. In particular, it analyses some of the critical factors and constraints bearing on the transition to a rapidly growing private market based economy: the political and constitutional uncertainties and their effect on policy making; the role of the local population in governance and the economy; the nostalgia for the Kosovo of the late-1980s and the need to renew ideas and approaches; and the weaknesses of existing institutions. The discussion of the political economy is concluded with some observations on the sustainability of economic developments and policies. The final chapter of this volume identifies the key economic and social policy priorities and the actions taken by UNMIK as the reforms necessary over the medium term. It provides a summary of the state of play, the essential priorities and suggested policy reforms in each of the economic and social sectors described above.

The second volume of the report contains a detailed elaboration of the current state of knowledge in each of these areas and a discussion of the policy reform agenda.

The report has been discussed with UNMIK and with civic organizations in Kosovo as well as with the staffs of the European Commission, the International Monetary Fund and of UNMIK. Nevertheless, the World Bank is solely responsible for the analysis and policy advice contained in this document.