30 May 2006

Kosovo business holds its breath

By Eric Jansson and Neil MacDonald
Published by the Financial Times, 30 May 2006

In the shadow of the Bjeshket e Nemuna, the Damned Mountains of western Kosovo, sits a small factory that slices, fries, spices and bags 100 kg of potato crisps an hour under the domestic brand name of Luko Chips.

Luko, the company, boasts assets of which most small businesses in Kosovo can only dream: free access to western technical expertise, a ready supply of fresh raw materials – four locally-grown varieties of potato – and investments of €110,000 from a charitably-motivated Swiss owner who plans a distribution of shares to workers this year.

Luko’s production line, overseen by polyglot managers in white coats, is orderly and clean and the company has succeeded in forming regular partnerships with local suppliers. Well-managed local production does, in fact, exist in Kosovo.

But the scarcity of such examples is a perennial concern for economists, who note that domestic businesses’ overwhelming preference for small-scale, import-based trade and services – rather than production and export – contributes to a gaping trade deficit. In 2004, this ballooned to 41 per cent of gross domestic product.

With the province’s current account deficit rising to 31.5 per cent of GDP last year, according to a World Bank estimate, a heavy burden of maintaining financial stability still falls to foreign donors, whose sizeable contributions are backed up by remittances from a robust Kosovo Albanian diaspora that sends home some €350m (14 per cent of GDP) annually.

Kosovo’s post-war economy has neither grown nor shrunk significantly since 2001, in spite of massive inflows of aid and remittances, plus rapid growth in local commercial and household lending.

Many companies, including Luko with its distinct advantages, struggle to turn a profit. “I cannot pretend this is a favourable environment,” says Jan Stiefel, Luko’s general-director.

The view from dusty Gurrakoc, where the potato chips factory is located, and the hundreds of other sleepy towns where most of Kosovo’s population lives, contrasts sharply with the view given by elected officials in Pristina.

The politically-minded capital is buzzing this year with predictions of imminent independence, seven years after Serbia withdrew its forces from the rebel province. Local politicians routinely promise economic renewal if and when the province’s secession becomes final. Independence, they argue, would allow Kosovo to capitalise directly on an ongoing privatisation process that has so far attracted €240m in investment, revenues from which are held in a trust fund outside the province in the absence of sovereignty.

World Bank economists cautiously echo this view, calling Kosovo’s unresolved status “the major deterrent to private-sector growth” although bank officials cite “heavy pressure” from the United Nations diplomats in charge of Kosovo not to publicise this opinion.

Soren Jessen-Petersen, special representative at the head of Kosovo’s UN-run administration, says economic expectations should not be linked explicitly to the status issue.

“The lack of status is a major obstacle to foreign direct investment,” he says, but adds: “The short term will be extremely difficult. You do not just raise the flag one day and the investors arrive the next day.”

Whatever Kosovo’s political status may be 12 months from now, those investors already on the ground say that everyday barriers are the primary obstacle to economic growth.

Ironically, some of the greatest difficulties are found in areas where Kosovo claims comparative advantages.

For example, UN and World Bank officials describe Kosovo’s mineral and energy resources as critically important for its economic future. But the lack of a reliable electricity supply still forces companies to depend on their own power sources.

The potato chips factory in Gurrakoc, in typical fashion, powers everything – from production lines to the head office’s fluorescent lights – using a diesel generator. The fuel costs drain a company whose monthly revenues fall just narrowly short of running costs.

Luko has addressed this typical problem in an innovative way. Pushed to cut spending in the face of soaring fuel prices, it last year started recycling sunflower oil by mixing it with diesel to run the generator.

Staffing problems are also rife. Companies report severe difficulties finding skilled workers, although an estimated 35 percent, possibly more, of the province’s workforce is unemployed. Companies are flooded with applications, but recruiters complain that most job-seekers lack a standard high school education – a sad legacy of Serbia’s blockade against Kosovo’s home-grown schools during the 1990s.

Security also remains a problem. Some foreign investors complain privately about threats or intimidation by local rivals.

Even some pro-independence analysts say that the greatest obstacles to Kosovo’s economic growth are practical and technical, rather than political.

“Kosovo is not a big economic problem. Believe me, it is easy to manage. You just need rule of law, better infrastructure and improved education for this big, young population,” says Muhamet Mustafa, president of Riinvest, a leading economic research group in Pristina.

Citing the case of Estonia, Mr Mustafa notes that Europe’s smallest, poorest transition economies were the quickest to emerge as success stories after the Soviet empire’s collapse. Whether Kosovo can follow suit in the wake of Yugoslav rule – plus seven years of international guidance – remains to be seen.

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