Democracy and Governance in Kosovo
The Development Challenge:
Kosovo faces three major near term challenges. First is the creation and/or strengthening of newly-formed economic and democratic institutions and procedures. Paramount among these are fiscal and budget institutions, a fair and transparent justice system, central and municipal government organizations functioning openly in response to society's needs and aspirations, and a body of laws and procedures permitting social and commercial life to function smoothly. Second is stimulating the private sector to create jobs and generate profits to feed growth, to produce tax revenues, to finance service delivery and development, and to provide employment. Third is preparing Kosovo for integration into Europe, the logical center of Kosovo's economic and political future. Integration will stimulate economic activity and assure a better life for all of Kosovo's population.
Over the last five years, the combination of accelerated institution building and sound economic policies has resulted in many impressive accomplishments in the economic sphere. Kosovo is moving deliberately from a command to a market economy, adopting new systems and values in the process. Gross domestic product (GDP) has risen over 40% since 2000, although much of this growth can be attributed to the presence of the international community and its impact on the consumer economy. Total deposits in the banking system have increased by 24% during 2004 and the loan-to-deposit ratio increased from 42% at the end of 2003 to its current level of around 57%. A sound tax system now finances all expenditures in the Kosovo Central Budget from domestically collected revenues. A modern pension system has been installed. The budget process and Treasury systems compare favorably with others in the Balkans, and Kosovo is progressing well in meeting the set of Economy Standards. Inflation, as in the broader Euro Zone, is around 2%. Nonetheless, while functioning at an adequate level, economic structures are weak and capabilities thin. Analyses reveal weaknesses that over the medium-term make the economy vulnerable. The economy continues to absorb expenditures at a level much larger than GDP. Private remittances plus donor inflows at levels not sustainable finance this huge imbalance. More recently, there are signs that the economy has stabilized and that growth has slowed. Most of Kosovo's neighbors are now growing faster than Kosovo, which still has the lowest GDP per capita in the region at $1,280. It also has the largest percentage of population living at a subsistence level, with 47% of the populace living on under $2 per day. Both foreign and domestic investment are constrained by uncertainty associated with Kosovo's future status. The private sector accounts for only around 35% of the official economy with the public sector being the driving force. Unemployment, which many estimates place at 50% - 55% is arguably the key social and economic problem for Kosovo. Twenty-five thousand new individuals join the labor force annually.
Kosovo's political structures are maturing. Assembly elections were held in October, and were considered to have been free and fair, despite a boycott by the Kosovo Serb population. No single party won a clear majority, leading President Rugova's party and Ramush Haradinaj's party to form a new coalition government with several other smaller Kosovo Albanian and non-Serb minority parties. Additionally, a true opposition emerged for the first time from these elections. Civil society was active in the elections, running a "get out the vote" campaign which helped encourage all communities to vote. Unfortunately, most Kosovo Serbs did not participate in the election due to mixed signals from Belgrade about participation and local dissatisfaction with the state of affairs in Kosovo (less than 1,000 out of 130,000 Kosovo Serb eligible voters participated in the elections). Regardless, Kosovo Serbs will retain 10 set-aside seats in the Assembly and several positions within the government. International advisors and assistance will continue to be needed in the Assembly to help make this body a responsive part of the provisional government.
The tragic events of March 2004 in Kosovo, when ethnic tensions flared up into violence leading to loss of life and property damage, are a reminder of the fragility of the ethnic relations in Kosovo and the importance of efforts to address issues facing all of Kosovo's communities. Kosovo is making progress on implementing the "Standards for Kosovo," and in mid-2005 the Contact Group (Britain, France, Germany, the United States, Russia and Italy) will formally assess Kosovo's progress in achieving these standards. If the international community decides after the formal review that Kosovo has made sufficient progress on the standards, a political process to determine Kosovo's future status will begin.
(Excerpted from the 2006 Congressional Budget Justification for Kosovo)
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