Economic and Social Reforms for Peace and Reconciliation

Prepared by the World Bank

February 1, 2001

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Pre-conflict economy. Kosovo has a rich mineral and natural resource base, and fertile agricultural land. From being predominantly an agricultural economy as a province of the republic of Serbia within the Socialist Federal Republic of Yugoslavia (SFRY) in the immediate post Second World War period, economic transformation wrought by central planning led to industrialization and development of mining. During the 1970s-80s, Kosovo’s development became a priority for the SFRY government. The province received significant investment resources from a national investment fund. This financing largely benefited the capital intensive extractive industries and infrastructure. Thus, over the two decades, 1970-90, economic activity increasingly centered on mining and production of raw materials and semi-finished products (lead, coal, zinc and some textiles), but agriculture continued to be important. Over this period, the share of industry and mining in the output of the province rose from one-third to one-half, whilst that of agriculture fell from nearly one third to one fifth.

By the mid-1990s, however, the latest year for which rough data are available, the structure of output had reverted to that a quarter of a century earlier. This phenomenon reflects, of course, the massive de-industrialization. Notably, growth in output slowed markedly over the industrialization period (Table 2), reflecting poor resource allocation decisions. This slowdown was exacerbated in the first half of the 1990s, when income per head fell by an annual average of an astonishing 13.4 percent as the industrial sector and other parts of the organized sectors contracted sharply and employment was reduced in tandem.

The policy and regulatory environment was based on SFRY-style state and social ownership: heavy industry was largely state and socially owned. Commercial criteria did not play the dominant role in decision-making; decisions on resource allocation and location of industry, for example, were based on regional factors or were politically inspired. More than 60 percent of the pre-conflict population lived in rural areas, and agriculture was nearly universally privately held. Despite its economic potential, Kosovo has traditionally been SFRY's poorest province: in 1988, output per head in Kosovo was 28 percent that of SFRY as a whole.

Table 2: Growth Indicators
(annual average in percent)

In 1989, the autonomy of Kosovo within the republic of Serbia was suspended. Over the succeeding five years, GDP contracted by 50 percent, falling to less than US$400 per head by 1995, according to official statistics, with a particularly severe contraction in industry and mining. In that year, industry and agriculture were each responsible for about one third of GDP, with trade and commercial activities accounting for the remainder. Over the past decade, industry, mining and infrastructure in Kosovo have been characterized by massive disinvestment in net terms (gross investment flows are shown in Table 3) and neglect of operations and maintenance.

The fall in gross investment in the industrial and mining sector in the late 1980s is particularly striking: these sectors are overwhelmingly under state or social ownership. Data for the 1990s are not available, but, undoubtedly, investment stagnated during this period. The fall-off in investment in the agriculture and the public utility and housing categories was less pronounced owing to the large private ownership element in agriculture and housing. Overall gross investment in 1990 amounted to two-thirds of the flow twenty years earlier. Unemployment was already high before the recent conflict in reflection of the stagnation in the Federal Republic of Yugoslavia (FRY) economy.

Economic impact of the conflict. The economic consequences of the spring 1999 conflict were severe. Industrial output collapsed and agriculture production plummeted, with livestock herds lost or killed and the planting season missed. Actual conflict-related damage is concentrated on private housing – both urban and rural, in particular in the west of the province – agriculture, and some infrastructure. The private homes that were used to provide parallel health and education services were also badly damaged.¹

Among the most significant impact of the recent conflict was the massive flight of people from their homes and the dislocation that this caused. Of the province’s estimated pre-conflict population of 2.2 million (82-90 percent ethnic Albanian), it is estimated that over 800,000 Kosovar Albanians fled to neighboring Albania, Bosnia and Herzegovina, Former Yugoslav Republic of Macedonia (FYR Macedonia) and other parts of FRY, plus tens of thousands to other countries during the course of the conflict. More than half a million were internally displaced and over 6,000 killed. Over 100,000 ethnic Serbs had also fled Kosovo by the end of the hostilities.² With this exodus, many institutions lost their staffing and management. While by late August 1999, most Kosovar Albanian refugees had returned, the post-conflict period has seen a massive exodus of Serb Kosovars, with the consequent loss of vital technical and managerial skills in administration and public enterprises. It is estimated that the pre-conflict population of Kosovar Serbs has been reduced from nearly a quarter of a million to below 70,000, while that of gypsies³ from 150,000 to only 30,000. Unemployment remains extremely high. There are no official estimates of domestic product, but it is clear that Kosovo ranks amongst the poorest parts of Europe. Consumption is clearly much higher than domestic income, given reliance on a heavy flow of remittances from the ethnic Albanian diaspora.

The current economy. Through indigenous enterprise, assisted by donor support, the Kosovar economy appears to have made a strong start in recovering from the contraction in output per head seen over the past two decades and then the ravages of the spring 1999 conflict. No official statistics of output or investment exist, but the repair of housing, the tilling of farmland, burgeoning services in urban areas, and even the revival of some enterprises provide testament to the industry of the population and its determination to make up for lost time. These developments reflect not only the impact of donor assistance but also reliance on domestic savings and inflows of diaspora funds for investment as well as a sturdy belief in self-effort. Nevertheless, it is clear that conflict related damage, the poor state of infrastructure, inadequate energy supplies and denuded capital stock in enterprises are powerful factors constraining growth.

The table below, prepared by IMF staff,⁴ provides a useful snapshot of the economy in 2000, with IMF estimates of both domestic product and domestic consumption. The Fund staff estimate GDP from estimates of public and private expenditures (based on a Riinvest household survey, public budget estimates, donor financing of investments and official import data). The estimate of domestic output is DM3 billion or about US$750 per head; and of domestic consumption at DM4.5 billion or about US$1,125 per head. Diaspora remittances account for the large difference between domestic output and consumption. All estimates of provincial accounts are subject to enormous margin of error; that said, it is believed that the snapshot presented below provides a guide as to the current state of the economy.

¹ Estimates of expenditures required to address conflict-related damage and the effects of prolonged neglect of maintenance of the capital stock and of infrastructure are contained in a joint EC-World Bank report, Towards Stability and Prosperity: A Program for Reconstruction and Recovery in Kosovo. (pdf, 850 KB)

² Based on UNHCR data as of June 1999.

³ Report by P. Polansky for Oxfam and Society for Threatened Peoples.

⁴ Kosovo – Macroeconomic Issues and Fiscal Sustainability (www.IMF.org)