Kosovo
The Development Challenge
Four years after war swept through Kosovo, dislocating over half of the population and devastating the economy, the reconstitution of a functioning economic, political, and cultural environment is well underway. Having addressed the most immediate needs following the end of conflict, Kosovans are engaged in rebuilding the institutions and the foundations of their society. Many challenges lie ahead, most prominently the strengthening of Kosovan economic and democratic institutions, building a sustainable and growing economy that creates jobs, and developing a harmonious multi-ethnic society that is responsive to the rule of law.
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Over the last four years, the combination of accelerated institution building and sound economic policies has resulted in impressive results in the economic sphere. GDP has risen over 40% since 2000. Total deposits in the banking system increased by approximately 17% over the past year and the loan-to-deposit ratio increased from 21% at the end of 2002 to its current level of 39%. A sound tax system now provides 100% of recurrent expenditures of the Kosovo Consolidated Budget from domestically collected tax revenues. However, a deeper analysis reveals weaknesses and aberrations that make the economy vulnerable. In the Balkans region, Kosovo has the lowest total GDP, the largest percentage of population living at a subsistence level, and partly because privatization has been slow, Kosovo remains the most command-driven economy, in that the private sector accounts for only 28% of the official economy. Both foreign and domestic investment are constrained by insufficient rule of law, poorly defined property rights, and a lack of trade agreements with neighboring countries (with the exception of Albania). Unemployment is arguably the key social and economic problem for Kosovo, with estimates ranging from 35%-50%. Rates are especially high among youth (ages 16-24), women, and the rural population. Exacerbating this poor economic picture is the decreased level of donor assistance, as well as Kosovo's inability to access alternative sources of financing, such as from the International Finance Institutions.
On the political front, Kosovo has made important advances towards self-government: A Constitutional Framework established the Provisional Institutions of Self-Government (PISG), three free and fair elections have been held, and the transfer of competencies from the United Nations Mission in Kosovo (UNMIK) to the PISG is underway. This transfer of responsibility, however, has proceeded somewhat unevenly, and advances have been accompanied by polarization over issues including the rate and substance of transferred powers, the issue of final status, and continued presence of parallel governing and financial structures in select areas of Kosovo supported by Belgrade in contravention of UN Security Council Resolution 1244. While there has been a decrease in the rate of ethnically-motivated crimes and an increase in minority participation in organizations such as the Kosovo Police Service, the judiciary, and other public bodies, opinion polls indicate that inter-ethnic relations remain tense.
The United States has been, and continues to be, a major contributor to the recovery of Kosovo. Stability in the Balkans is of paramount importance to both the United States and Europe. Stability in Kosovo, and its integration into the region and Europe, is a requisite to achieving this regional stability. Kosovo's integration into the European economy is a key priority for the United States Government, and the conditions needed to achieve this integration are fundamental elements of the USAID program. The investment that the United States has made in Kosovo has been critical in bringing Kosovo out of a decade of neglect and conflict. The immediate challenges are to consolidate the gains made, ensure there is no relapse in progress, and continue to strengthen the foundations for a stable democracy and sustainable economy.
The USAID Program: A new USAID/Kosovo strategic plan covering FY 2004 -2008 was approved in August 2003. The new strategy moves from a humanitarian response focus of early interventions to a development program with the objective of transforming Kosovo into a democratic self-governing economically sustainable entity in which all citizens have equal opportunities and rights. The U.S. Mission has provided the impetus and support for much of the progress realized to date in Kosovo. The Kosovans (including the public sector, private sector, and civil society) have been active partners and participants in this recovery, exhibiting a receptivity to change that has been a major contributor to the substantial progress that has been made. This active participation is expected to continue into the new strategy period and will be a key ingredient in the reach and sustainability of the program. The Program Data Sheets provided below cover four core and two supporting objectives for which USAID is requesting FY 2004 and FY 2005 funds.
The two economic objectives concentrate on improving the institutional, policy, and legal environment for productive investments, while supporting the development and expansion of competitive industries, promoting growth in local and regional market share, and creating options for market-driven allocations of capital assets. Special emphasis will be placed on redressing the current over-reliance on trading and service industries.
The democracy objectives will support the transformation to self-government by strengthening recently-created democratic institutions, helping the Kosovans take ownership of these bodies, and strengthening the relationship between civil society and local governments so that they act as partners in furthering democratic processes. Building on the progress in devolving authority to municipal governments, USAID will initiate a local governance program that will address broad policy issues concerning municipal competencies and decentralization, as well as practical hands-on assistance at the local level. These activities will be complemented by civil society and media activities that will strengthen the ability of civil society and media to perform a watchdog role and assist effective citizen participation by increasing the level of citizen awareness and understanding of important political, economic, and social reforms.
Throughout the program there is an emphasis on capacity building, both institutional and human. The transition of Kosovo from the poorest province in the former Yugoslavia to a viable and fully functioning market-driven democracy is dependent on the capacity of Kosovans to both lead and sustain the transformation. Training and education activities will address the shortfall in human capacity that currently hinders Kosovo's ability to develop mature economic and democratic systems. Among these programs is a women's leadership activity implemented by the National Albanian-American Council.
Special initiatives will support an anti-trafficking program, provide assistance for effective turnaround management of the electric company, and support targeted assistance to the health sector through HIV/AIDS and tuberculosis control programs. FY 2004 funds will be used to transition from the current program to full implementation of the new strategy as projects are designed over the course of the year.
Other Program Elements: None
Other Donors: The European Commission, through programs implemented by the European Agency for Reconstruction and through funding for UNMIK's Pillar IV (Reconstruction, Economic Recovery and Development), has been the largest donor to date, with activities in public administration reform, decentralization, judiciary, customs and taxation, energy, environmental management, economic development, minority return, rural development, civil society, and university education. Other major donors and their principal areas of focus include: Germany (energy, water, transport, private sector development); Canada (education, public administration, public health); Sweden (agriculture, returnees, youth, anti-trafficking, energy, civil society); the United Kingdom (civil society, access to justice, customs, health, social policy, public administration); Switzerland (business development, agricultural, environmental protection, vocational education); and the United Nations Development Program (security, job-creation and minority programming, local development). Although there are few formal mechanisms for donor coordination, donor collaboration has increased significantly over the past year, most significantly in the areas of support to the central and municipal assemblies, legal reform, judicial reform, and media.
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