Economic Sustainability and Final Status

University of Pennsylvania Journal of International Economic Law

Spring 2004

Articles

*259 ECONOMIC SUSTAINABILITY AND FINAL STATUS FOR KOSOVO

Henry H. Perritt, Jr. [FNa1]

Perritt, Jr.

1. Introduction

Nation-building cannot succeed unless political trustees [FN1] give greater priority to economic development. In the political trusteeships of the late twentieth and early twenty-first centuries, private sector economic development has taken a backseat to humanitarian relief, human rights work, and the establishment of political institutions. Part of the problem may be the immaturity of *260 development theory. Some scholars emphasize capital formation as the crucial component needed to accelerate development through universal stages; others emphasize human capital formation; structuralists emphasize country-specific analysis of institutional impediments to development; [FN2] and neoclassicists emphasize the need for the government to stay out of the way. [FN3]

But political trusteeships are not academic exercises, and development theory actually has played only a dim background role in recent initiatives. More often, inattention to economic development has resulted from the reality that human rights violations or international security threats usually justify the intervention, and that senior personnel recruited to run political trusteeships are more oriented by background and expertise to human rights or diplomacy than to private sector entrepreneurship and capital formation. Administrators of political trusteeships do not have textbooks on development by Walt Rostow or Gale Johnson behind their desks; instead they have copies of the International Covenant on Civil and Political Rights, the Geneva Conventions, the European Convention on Human Rights, and the Helsinki Accords.

The political trusteeship in Kosovo provides an interesting case study from which lessons can be learned about how to place private sector economic development higher on the list of trustee priorities. The mandate of the political trustee in Kosovo was especially robust, including virtually very aspect of sovereignty. The local culture and experience, while problematic, was hospitable to market-oriented economic interaction. Accordingly, a close examination of the missteps in Kosovo can inform future political trusteeships so that the international community does a more effective job in promoting economic opportunities for trust beneficiaries.

*261 For administrators who are interested in promoting economic development, the immediate practical challenges are not ones of selecting the right theory of economic development. Rather, they involve construing the trustee's mandate broadly enough to make the legal and institutional changes necessary for enterprise formation and capital investment; designing and erecting a hospitable legal infrastructure for private enterprise; establishing necessary financial service intermediaries; and assisting local entrepreneurs to promote products, services, and investment opportunities. Successfully meeting these challenges requires pragmatic legal and business acumen rather than theoretical creativity.

Familiarity with competing models for company law, payment systems, commercial dispute resolution, and property law transformation is more important to the operational decisionmaking of political trustees than is deep knowledge of theories of constitutionalism. Knowing how microcredit and investment promotion for small and medium enterprises ("SMEs") has worked in other countries in transition is more important than understanding the latest data on total factor productivity in the developing world.

Five years of political trusteeship by the international community in Kosovo has produced insufficient economic progress. The unemployment rate remains close to 60%; no overall vision for economic self-sufficiency exists; privatization has barely begun; and few steps have been taken to exploit the potential of entrepreneurial energy to start new SMEs.

Uncertainty about the final status of Kosovo is partly responsible for the slow start. U.N. lawyers questioned the legal authority to restructure inefficient enterprises, and Kosovo's lack of independent identity discourages outside investors. The U.N. Mission in Kosovo ("UNMIK") arbitrarily denies contact between Kosovar governmental representatives and the rest of the world. The European Union ("EU") Stability Pact mostly leaves Kosovo out of regional economic development activities. Kosovar political leaders are distracted from the important job of developing concrete programs for developing the private economy. [FN4] In other *262 respects, uncertainty about final status is merely an excuse for public entities to not do their jobs. Among other problems, there is a lack of transparency. Neither UNMIK nor the Provisional Institutions of Self Government ("PISG") promptly and reliably publishes their legislative acts.

The United States should begin the process of convening an international conference to decide the final status of Kosovo. UNMIK and provisional governmental institutions must meet their responsibilities to reform law and public administration to create a better investment climate. UNMIK must also establish important financial services intermediation to make it easier for entrepreneurs and investors to get together and make deals.

Successfully finishing the job in Kosovo is an important step in the achievement of the goals of political trusteeships elsewhere, such as in Afghanistan and Iraq. Withdrawing from Kosovo or perpetuating an increasingly illegitimate U.N. trusteeship there would likely lead to chaos, the collapse of physical security, renewed inter-ethnic conflict, and threats to security elsewhere in the western Balkans. Such a failure in a major international commitment would encourage those who believe that the campaign against terrorism cannot be won because the West lacks the discipline to persevere and to define achievable goals.

Kosovo's population is overwhelmingly Muslim and overwhelmingly loves America. Abandoning the prospects for a stable, democratic, prosperous secular state in Kosovo would raise doubts about the U.S. capacity to interact successfully with less hospitable Muslim populations elsewhere in the world.

On the other hand, staying the course in Kosovo, refocusing attention on economic development, providing leadership to other elements of the international mission there, and eventually achieving an independent state with appropriate political, economic, and security ties to the rest of the region will yield valuable lessons that can inform other nation-building efforts.

Ambiguity in the mandate for the political trusteeship in Kosovo led to roadblocks to early initiatives for economic restructuring. The elements of a sustainable private economy that still need attention in Kosovo are the same in any nation-building enterprise. Preoccupation with privatization, at the expense of attention to agricultural reform and to SME formation, is a mistake *263 that can be avoided elsewhere. Shortfalls in private sector-oriented economic expertise and tools hamstrung the early Kosovo trusteeship; it should not impede similar efforts in the future.

2. Background

The political trusteeship [FN5] in Kosovo exists under the mandate of U.N. Security Council Resolution 1244, which followed military intervention in Kosovo by the North Atlantic Treaty Organization ("NATO") in 1999. Tensions between Albanians, the majority ethnic group, and Serbs, the minority ethnic group, in the territory of Kosovo predated the dissolution of the Ottoman Empire. As the Ottoman Empire eroded in the late nineteenth century, emergent Serbia, initially as an autonomous principality within the Ottoman Empire, and then as an independent state, began to press Albanians to leave the territory of modern-day Kosovo. [FN6] In 1878, Albanian nationalists assembled at the League of Prizren to develop a strategy to defend Muslim and Albanian traditions against encroachment. The League took over the administration of Kosovo for about a year, but in 1881 the Albanian "insurrection" was crushed by Turkish troops. [FN7]

By the time of the first Balkan war in 1912, Serbia was an independent state and sent its troops into Kosovo, consolidating Serbian rule and thereby preventing the unification of the Albanian population in Kosovo with the new state of Albania, recognized in 1913. [FN8]

In 1915, the Austro-Hungarians, Germans, and Bulgarians expelled the Serbs from Kosovo and occupied Serbia. But in 1918, Serbs reoccupied Kosovo and on December 1, 1918, a new Yugoslav state called the "Kingdom of Serbs, Croats and *264 Slovenes," was established.

Kosovar Albanians resisted incorporation of Kosovo into the emerging Yugoslavia. "It was, after all, a state of the south Slavs, as it[s] name suggested, and the Albanians are not Slavs." [FN9] Briefly, during the post-World War I Paris peace conference, Kosovar Albanians were encouraged to believe that a unified Albanian state would emerge from the wreckage of the now defunct Ottoman Empire. [FN10] Eventually, however, not only was Kosovo made part of what became Yugoslavia, but only with President Woodrow Wilson's intervention did Albania avoid its own breakup and partition.

Albanian resistance to the Serb government continued at various levels of intensity during the interwar period. When World War II broke out, Italy occupied Albania and eventually extended its military control throughout Kosovo and Albanian areas of Macedonia. Tito, the new ruler of Yugoslavia, sought to attract Albanian support for his "partisan" movement by promising autonomy to Kosovar Albanians. However, after the end of World War II, attracting Serbian support was more important to Tito and Albanian national aspirations had to be deferred once again. Only in 1974, with the adoption of a new constitution for Yugoslavia, were Kosovar Albanians granted formal autonomy as an "autonomous province" within Serbia. The legal status of autonomous province was equivalent to the "republic" status given Slovenes, Croats, Montenegrins, and Macedonians except that an autonomous province had no power to secede from Yugoslavia. Under the 1974 constitution, Kosovar Albanian aspirations intensified as Albanians were allowed to set up Albanian-language institutions, such as the University of Prishtina.

Historically, investment in Yugoslavia was politically motivated. Kosovo was a grim place in the 1960s; the only way to survive was agriculture. Consequently, anyone who could emigrate did so, and the Serbs were concerned that this would deplete the Serb population.

Later, 80% of all Yugoslav investment in underdeveloped parts of Yugoslavia was in Kosovo. Most of it went to the Trepca mines. *265 Kosovo was a supplier to socially owned enterprises ("SOEs") [FN11] elsewhere in Yugoslavia with an emphasis on colored metals. Money flowed, as the Yugoslav government thought it necessary to prevent unrest. This process started in 1974. Infrastructure was only built to support SOEs. A good example is Rahovec, where an SOE with supporting infrastructure was built to prevent a Serb exodus.

Susan Woodward has developed a persuasive case that the collapse of Yugoslavia was occasioned as much by an economic implosion as by a leadership succession crisis after Tito's death, and far more by economic hardship and immature political institutions than by "ancient ethnic hatreds." [FN12] As the Cold War ended, international institutions such as the World Bank and the International Monetary Fund ("IMF") lost interest in Yugoslavia. Unemployment in all of Yugoslavia grew from just under 14% in 1979 to nearly 17% in 1988, and from just under 40% in Kosovo to nearly 60% during the same period. Gross domestic product ("GDP") growth declined from a positive 5% in 1979 to a negative 10% in 1990. [FN13]

The University of Prishtina, established in 1974, was meant to reduce Albanian unrest, but it made problems worse. It led to the creation of an Albanian bourgeoisie, which strengthened Albanian nationalism. As Yugoslavia began to fall apart after the death of Tito and the end of the Cold War, Serb Communist leader Slobodan Milosevic discovered that he could accelerate his political rise by currying favor with minority Serbs within Kosovo. [FN14] Milosevic changed the Yugoslav Constitution to revoke Albanian autonomy. [FN15] This decision was followed by an "Albanian declaration of independence" in September 1991 and the erection of a parallel political, legal, and economic structure, beginning in *266 1992. [FN16]

By the mid-1990s, when the Dayton Accords ended the Bosnian War, it was clear that the campaign of passive resistance organized by Ibrahim Rugova, the leader of the Democratic League of Kosovo ("LDK"), was not working--or in any event that it would not attract sufficient international intervention to make an independent Kosovo a reality. Gradually, armed resistance to Serb control developed among Kosovar Albanians, crystallizing into the Kosovo Liberation Army ("KLA") in early 1998. After 1989, the Kosovar Albanians were removed from management positions in the SOEs, but they became middlemen in a hyperinflationary Yugoslavia. The fact that the Albanians became rich made them a target of the Financial Police in 1998 and 1999. As Albanian unrest increased, so did Serb repression, which had the effect of improving KLA recruitment. [FN17]

By mid-1998, NATO began to threaten military intervention unless Milosevic ceased his efforts to drive Kosovar Albanians from their homes into refugee camps in Albania and Macedonia. After a brief agreement in October 1998, brokered by Ambassador Richard Holbrooke, violence flared up again in early 1999. In January, a peace conference was convened in Rambouillet, France. After much maneuvering and pressure, the KLA signed the agreement, but the Serbs did not. Kosovar agreement was induced in part by a letter dated February 22, 1999, from Secretary of State Madeleine Albright promising a "referendum on the final status of Kosovo after three years." [FN18] After a round of ultimately futile last minute meetings with Milosevic, the NATO bombing campaign began on March 24, 1999. [FN19]

On June 10, 1999, NATO "suspended its bombing and the U.N. Security Council passed Resolution 1244." [FN20] U.N. Security Council Resolution 1244 ("Resolution 1244") envisions the possibility of independence. [FN21] But the Resolution is ambiguous in that it *267 recognizes Yugoslav sovereignty during the period of U.N. civil administration. The ambiguity has permitted some lawyers and policymakers to obstruct political and economic development in Kosovo.

Resolution 1244 put the United Nations in the position, for the first time, of exercising sovereignty and running a country. [FN22] Resolution 1244 and subsequent implementing documents issued by the Secretary General of the United Nations established UNMIK [FN23] as a political trustee, [FN24] exercising sovereignty on behalf of the people of Kosovo. Under this arrangement, UNMIK exercises legislative, executive, and judicial functions without differentiating them very clearly. [FN25] These governmental powers continued even after elections were held and local judges, legislators, and ministers took office under the "constitutional framework." [FN26]

Resolution 1244, while recognizing Yugoslav sovereignty, [FN27] vests UNMIK with "basic civilian administrative functions where and as long as required." [FN28] This authority is to be transferred to "local provisional institutions," [FN29] and eventually from them to *268 institutions emerging from the final political agreement, under UNMIK oversight. [FN30] UNMIK is expressly directed to support "the reconstruction of key infrastructure and other economic reconstruction." [FN31] Section 6 of UNMIK Regulation Number 1 expressly provides for UNMIK's administration of movable and immovable property registered in the name of the Federal Republic of Yugoslavia ("FRY"). [FN32] UNMIK thus possesses the necessary legal authority to adopt legislation and to take executive steps to create and to transfer property rights necessary to economic development and the attraction of foreign capital.

The sovereignty provisions of the preamble to Resolution 1244 were carefully worked out, and the Resolution in its entirety represents a thoughtfully negotiated ambiguity with respect to the question of whether Kosovo should be an independent sovereign state or only "autonomous" within the Yugoslav federation.

UNMIK comprises four "pillars": Police and Justice (Pillar I), Civil Administration (Pillar II), Institution Building (Pillar III), and Economic Reconstruction (Pillar IV). Each pillar is headed by a Deputy Special Representative. UNMIK itself is responsible for Pillars I and II. The Organization for Security and Cooperation in Europe ("OSCE") is responsible for Pillar III, and the EU is responsible for Pillar IV.

While substantial international resources have been made available to Kosovo, economic development beyond physical infrastructure reconstruction and macroeconomic frameworks *269 seems to be almost an afterthought in UNMIK policy. For example, the June 2003 report by the Secretary General to the Security Council on the U.N. Mission in Kosovo [FN33] does not mention economic development until the forty-second paragraph and then contains seven relatively general paragraphs focused primarily on public finance and privatization. [FN34]

By early 2003, criticism of and frustration with UNMIK was growing, fueled by impatience with the slow pace of transferring final decisionmaking authority from UNMIK to local institutions. Frustration with UNMIK is also fueled by a growing belief that UNMIK institutions are not transparent, are frequently corrupt, and in any event have no political accountability in the democratic sense.

The most important barriers to private sector economic development are unreliable electricity, high wages, high tariffs, small markets, and a heavy flow of imports.

Kosovo's comparative advantages include: large numbers of young people with skills and languages, and linkages with those in the Albanian diaspora around the world which can be turned into stronger and more traditional business linkages.

There are significant lignite reserves in Kosovo. It has the best in the region, and the costs of extraction are only one-third those of runner-up Bulgaria. So exporting energy in the form of lignite itself or in the form of electricity is an interesting possibility. It is true that Kosovo used to export electricity to Montenegro and Croatia, but via a transmission system through Serbia. The Kosovo Energy Corporation ("KEC" or "KEK") plan is completely outsized unless it was built to produce power for export.

3. The Record So Far

Five years of political trusteeship by the international community over Kosovo have produced an end to ethnic cleansing, increased law and order, improved standards of living for the majority Albanian population, produced three sets of peaceful and fair elections--albeit with declining turnout--and *270 overseen the functioning of local government institutions in the executive, legislative, and judicial spheres. The political trustee, UNMIK, has made far less progress, however, on the economic front. After the war, the KLA took over vacant SOEs by posting "property of the Kosovo state" posters. It is not altogether clear that this was illegitimate because the Democratic Party of Kosovo ("PDK") led the interim government. But many people perceived it as illegitimate. The prewar Kosovar Albanian businessmen were the elites of the private sector, but after the postwar construction boom, which now has tailed off, they are not sure of the "next big thing." They have no skills in the modern sense, only instincts, courage, and money. The unemployment rate remains at about 60%. Most of the good jobs are with international organizations, all of which plan to cut back on their levels of activity and employment in Kosovo. Only twelve of several hundred SOEs were commercialized, [FN35] and only eighteen have taken the first steps toward being privatized, before a new EU administrator of Pillar IV "froze" privatization in October, 2003. According to most estimates, only about sixty of these SOEs will develop into viable businesses in a market economy. U.N. lawyers opposed to fundamental reform of real property law and questioning the U.N. mandate to restructure certain enterprises delayed repeatedly--for two years and then again in late 2003--operation of a Kosovo Trust Agency ("KTA"), [FN36] originally established in 2001.

Publicly owned enterprises such as the telephone company ("PTK"), KEC, the Trepca mines, the airport authority, and the railways have not been privatized, lack clear direction, and are inefficient. Electric power interruptions continue to be common; telephone service, while reasonably reliable in major cities, is absent in the countryside, and the plant is obsolete.

In some ways, however, the private sector is flourishing. Almost immediately after the war, restaurants and filling stations *271 sprang up everywhere. Private entrepreneurial energy created an internet backbone whose revenues are growing at rates of 250% per year, and which operates one of the most advanced wireless backbones in the world. Local places providing lodging and recreation such as swimming pools and hotels catering to internationals are numerous and profitable. But most entrepreneurs channel their energy into trade rather than manufacturing or service undertakings attracting foreign exchange. Individual Kosovars wanting to start a business do not know how to do so and do not have a place to go to get basic advice. Only sporadic organized efforts inform outside investors about investment opportunities in Kosovo. [FN37]

Neither the international community nor local economic and political leaders have articulated an overall vision for self-sufficiency in Kosovo.

Part of the problem is that the international community, especially UNMIK and the World Bank, wasted too much time wringing their hands over whether UNMIK's mandate under Resolution 1244 and the World Bank's Charter permitted either of them to take action necessary to stimulate local economic development. The answer is clearly "yes" with respect to Resolution 1244 under the Political Trustee concept. [FN38] Now, the World Bank has figured out a way to channel assistance through UNMIK. [FN39]

Serious progress on the economic front in Kosovo requires a rapid and successful privatization of SOEs and implementation of a more robust plan for publicly owned enterprises. But more importantly, it requires an initiative for development of SMEs that *272 can provide jobs, achieve import substitution, and, eventually, earn foreign exchange. Success with privatization and SME development requires a clearer macroeconomic vision, a stronger sense of where comparative advantage lies for Kosovar industry, and the development of a richer array of financial intermediaries, including small business assistance entities, more transactional lawyers, professional education tracks, targeted investment funds, and possibly stock market and futures exchanges. It also requires progress on final status.

4. Security Council Resolution 1244 as a Roadblock

Creating acceptable conditions for private investment was an essential part of nation-building in Kosovo from the outset. UNMIK was slow to accept this responsibility for two reasons. First, many observers of Kosovo thought that investment and private sector engagement had to wait for a comprehensive rule of law and market-oriented political institutions to be established. That was a mistake; nothing will ever be fixed if the private sector or policymakers wait for these changes before beginning economic development efforts. Instead, economic development must be integrated with building a rule of law, and both must proceed in tandem. That should have been the case in Kosovo from the end of the war, but, regrettably, economic development has always had a lower priority than UNMIK consolidation, war crimes investigations, organizing elections, and facilitating interethnic cooperation.

Second, UNMIK's lawyers misinterpreted Resolution 1244 so as to limit UNMIK's power over the factors of production in Kosovo. They interpreted the explicit reference in the preamble of Resolution 1244 to the continued sovereignty of the FRY over Kosovo as a limitation on any change in property interests. That refusal to allow UNMIK to alter property interests and the resulting uncertainty created negative consequences for investors.

The acknowledgement of sovereignty in the preamble was not a legal barrier to thoroughgoing U.N. efforts to rationalize the Kosovar property regime. While Resolution 1244 acknowledges FRY sovereignty, it also grants plenary powers of "civil administration" to the U.N. In addition, it explicitly authorizes the U.N. to transfer these powers to local provisional authorities and ultimately to institutions created or provided for in the eventual political settlement.

*273 4.1. UNMIK, as a Trustee, Has Broad Powers

UNMIK should be understood as a political trustee [FN40] for Kosovo, exercising most of the important attributes of sovereignty on behalf of the people of Kosovo. UNMIK has the same power over property as a common law trustee, [FN41] and also has authority to transfer these powers to interim governmental entities, private investors, and institutions defined by the ultimate political settlement. The FRY has, at most, a defeasable reversionary interest, [FN42] which an ultimate political settlement might alter. [FN43]

Although there is no provision of Resolution 1244 that explicitly provides for termination of the U.N. trusteeship and the ultimate disposition of Kosovo, there is a pledge to respect the territorial integrity of the FRY for the duration of the trust. [FN44] There *274 is a further obligation, in Article 11(e) of the Resolution, for the trustee to facilitate a political process designed to determine Kosovo's future status, taking into account the Rambouillet accords. [FN45] Thus, the identity of the reversioner is an open question accompanied by a duty in the trustee to resolve that question, much like when a court holds property in trust until it can determine the rightful owner of the property, or when a common law trustee enjoys a power of appointment. [FN46]

In the meantime, as a trustee, UNMIK cannot waste the trust assets, must invest the asset prudently, and use reasonable care and skill to make the trust property productive. [FN47] Resolution 1244 includes authority for economic reconstruction and development; [FN48] UNMIK must work prudently to reconstruct and develop Kosovo's assets, including its real property. Like any trustee, UNMIK may sell trust property for the benefit of the trust and its beneficiary; [FN49] it can privatize industries and otherwise make transfers of property to facilitate economic development.

These trust concepts are not unique to the Anglo-American legal tradition. Indeed, many scholars assert that Roman, German, and Islamic legal traditions embodied trust concepts even before they arose in England. [FN50]

4.2. Displacing Discriminatory Property Law

Resolution 1244 empowers UNMIK to displace discriminatory laws and those inconsistent with international human rights principles. A series of discriminatory laws enacted by the FRY after 1989, including the alteration of traditional "social ownership" of many enterprises, cloud property ownership in Kosovo. [FN51] Beginning in 1989, Slobodan Milosevic accelerated his *275 efforts to displace Kosovar Albanian control over state and social property (two distinct categories) in Kosovo, shifting control to Serbian and foreign ownership, often through integration of Kosovar and Serbian enterprises. The result was Serb, French, and Italian ownership of many facilities and buildings that were needed to establish public functions and major enterprises. The U.N., by initially recognizing Yugoslav law as of March 1999, appeared to recognize these ownership interests. [FN52] In early December 1999, however, UNMIK promulgated Regulation Number 1999/24, repealing its initial determination to apply Yugoslav law that was in effect in June of 1999, substituting instead UNMIK regulations as primary law, with Yugoslav law that was in effect as of 1989 as a fallback. [FN53] The applicable-law regulation permits judges and other persons responsible for interpreting law to apply post-1989 law when it is not covered by UNMIK regulations or pre-1989 law and is "not discriminatory." [FN54] In the case of privatization, the proviso permitting application of post-1989 law is inoperative, because UNMIK's privatization regulations [FN55] occupy the field. There is, therefore, coverage by UNMIK regulations, and the predicate "not covered by UNMIK regulations" is not satisfied.

Invalidating the discriminatory property laws is an example of the kinds of powers that should have been exercised aggressively by the political trustee, recognizing such powers as entirely faithful to the duties imposed by Resolution 1244.

*276 5. The Macroeconomy

Two unusual features support Kosovo's economy: 1) expenditures by the international community and 2) remittances by Kosovars working in other countries. In 2003, Kosovo's GDP was $2.16 billion, or $1,122 per capita. The real GDP growth rate was 7.4% in 2002 and projected to be 4-5% in 2003. [FN56] Consumption was 126% of GDP and investment was 38% of GDP, down from 45% of GDP in 2002. Exports and imports of goods and services were 12.3% and 88.7% of GDP, respectively. Net transfers from abroad were 22.3% of GDP from private sources and 41.7% of GDP from public sources. The 22.3% was almost entirely remittances from Kosovars living outside Kosovo. [FN57]

The World Bank and the IMF observe that the Kosovo economy must be prepared to absorb the impact of declining outside investment and declining expatriate expenditures in Kosovo. [FN58] The IMF projects that foreign transfers will fall from 67% of GDP in 2001 to 15-20% of GDP in 2004. [FN59] The difference must be made up by increased domestic production.

International institutions hire Kosovars and pay them higher salaries than they can earn in domestic activities. The vast majority of young professionals work for international institutions, as opposed to working for the local governmental institutions or striking out on their own in private business or professional services. [FN60] In addition, international institutions are paying for *277 much of the infrastructure investment. Road signs are all over Kosovo identifying the donor who paid for a particular road improvement. Any plan for the Kosovo economy must specify how these sources of national income will be replaced as the international community withdraws and reduces its financial commitment, as is already beginning to occur. Continuing to work as a lawyer or an economist for a nongovernmental organization ("NGO"), intergovernmental organization ("IGO"), or the offices of foreign state is not likely to prove a very good career plan for many Kosovars. What else will they do?

Stimulating SME development and accelerating privatization are important for the creation of jobs. But enterprise formation and restructuring require capital, which requires savings, which requires income.

That means, in the short run, that the economic development plan for Kosovo must encourage those working for international institutions to save significant parts of their salaries. It also means that other streams of income from abroad must be identified and examined to exploit potential for savings.

The other source of international income, which may or may not be temporary, comprises remittances--money sent home by Kosovars working in other countries. Remittances usually are paid to family members and are extremely difficult to value because of the absence of a banking system in Kosovo until recently and the tendency for remittances to be paid in cash or in kind.

A rough estimate is useful. There are about 600,000 Kosovars living abroad. If one assumes that half of these earn compensation at an average of $25,000 per year and send 25% of that home, that amounts to $1.8 billion per year in remittances. The population in Kosovo is about 1.8 million, so the figure translates into $1,000 per capita in additional national income. [FN61]

5.1. Labor Markets

Even if Kosovo does not establish a strong enough economy to make up for the departure of the internationals, supply and demand in international labor markets will produce an equilibrium. Those Kosovars who are younger, better trained, and *278 capable of speaking English, German, or French will take jobs outside the country and will bid down their wage demands until they get jobs. That will tend to increase per capita income for those remaining in Kosovo in two ways: 1) by reducing the population remaining in Kosovo and 2) by increasing the flow of remittances.

But depopulation, especially in the form of a "brain drain," is not an attractive scenario. Moreover, the possibility of more Kosovars going to other countries to work depends on the willingness of other countries to accept them. Throughout the 1990s, the Milosevic apartheid created conditions that qualified many, if not most, Kosovars seeking work elsewhere for asylum. Now, and in the future, asylum abroad will be much harder to get, and there is no guarantee that countries with good jobs will throw open their doors to immigration by Kosovars seeking those jobs.

5.2. Savings and Investments

The second set of macroeconomic questions has to do with the level and nature of savings and investment. Anecdotal evidence suggests that the savings rate for Kosovar Albanians is relatively high. [FN62] The level of savings available for domestic investment, however, is another question. Much of the domestic savings may go to other countries for safekeeping against possible future economic or political upheavals or be held in the form of cash. Neither cash nor foreign bank accounts are available for domestic investment. [FN63] On the other hand, the experiences of ProCredit Bank (formerly Micro Enterprise Bank or "MEB") [FN64] and Reifessen Bank (formerly the American Bank in Kosovo or "ABK") suggest that when trustworthy savings institutions are established and promoted effectively, Kosovars are willing to put their money in such domestic institutions, which then channel it into productive investment.

Questions also exist as to how much of the actual domestic *279 investment is productive in terms of the capacity to produce future income. Capital market institutions and other business formation services are almost entirely lacking, and that makes it less likely that the available savings will be channeled into productive investment. Anyone who has driven around Kosovo realizes that an enormous fraction of total investment is going into the construction of large, detached houses. Based on anecdotal evidence, including personal conversations by the Author, many of the builders of these houses have vague notions that some sort of business will occupy the first floor.

Any modern economy relies on its pension system as an important source of savings. UNMIK has established the basic structure for a pension system in Kosovo. [FN65] The investment policy expressed in the UNMIK regulation allows pension trust funds to be invested domestically only in registered securities. [FN66] Pension payroll taxes will begin to produce efficient savings that can be channeled into productive domestic investment as Kosovo capital markets mature, depending on the investment policies of the pension fund managers. The content of these pension administration policies has enormous implications for economic development in Kosovo.

Much controversy surrounds the decision of the pension program administrators to invest pension plan assets outside of Kosovo. The decision was engendered by the absence of any financial markets institution within Kosovo that would permit investment in Kosovar enterprises while maintaining prudent diversification. The existence of some kind of investment fund, or at least a stock market, offering shares or holding interest in private Kosovar enterprises would facilitate keeping some pension plan assets inside the country, adding to the savings available for productive investment.

Similarly, ProCredit Bank has been criticized for obtaining far more in deposits from Kosovars *280 than it loans to Kosovar enterprises, investing the rest outside the country. [FN67] ProCredit Bank itself, however, reports rapidly increasing domestic loan volumes and describes major success stories of Kosovar businesses in which it has invested. [FN68]

The ABK (now "Reiffeisenbank") told the Author in 2003 that its loan-to- deposit ratios are close to 100%, but ABK sources report that the money available for investment exceeds the number of good business plans that are presented to lending institutions.

Many Kosovar business professionals identify the tariff structure as a significant impediment to developing viable business models. Raw materials and machinery are taxed at 25-26% (10% tariff plus 16% value added tax ["VAT" ]). Finished goods come in through Serbia and Montenegro with no tax at all because these are not designated "borders." This squeezes margins for Kosovar manufacturers to the vanishing point. Fixing the situation does not require policymakers to embrace a protective tariff policy; it simply requires reducing import barriers for raw materials and machinery. There was a proposal before the Economic and Fiscal Council [FN69] to reduce the tariff for machinery to zero, but the World Bank vociferously opposed this and, in the end, prevailed. Economists argue that both the import duties and the VAT provide a level playing field for domestic Kosovar producers. A producer must pay a VAT on raw materials and capital goods, but receives credit for this VAT when remitting a VAT charge to its customers. [FN70]

*281 Import duties provide a level playing field because everyone is taxed at the same rate. A Croatian milk producer pays 10% import duty on the total price of its milk, which includes capital costs. A Kosovar milk producer pays 10% on its capital goods, placing them in the same position. However, Kosovars argue that they are still at a disadvantage because of the long period of neglect of capital assets, combined with wartime destruction, meaning that they must rebuild their capital base and thus end up paying more in duty. Perceived inequities also may result from producers who buy in the formal sector, and thus pay tax, but sell in the informal sector. These producers do not collect tax, or their operations in the informal sector deprive them of the necessary documentation to receive credit for VAT paid. Kosovar producers also receive a rebate on import duties when they export. Proposals to reduce the import duty substantially, across the board, are under consideration.

Momentum is building to develop a "Balkans without borders" through a set of bilateral agreements that would eliminate tariffs for trade within the Balkans. A free trade zone would permit trade and investment patterns to be developed according to the wishes of entrepreneurs and natural relationships. This, more than any likely formal economic or political structures, would permit Albanians in various political territories to forge close relationships with each other. It is important to understand, however, that negotiation of a free trade area agreement for the Western Balkans may be a mixed blessing. While it will open up markets for finished goods to large Albanian populations in Albania, Macedonia, Serbia, and Montenegro, other results may make matters worse. Finished goods are more likely to come from within the region covered by a free trade agreement, while raw materials such as petroleum and machinery are more likely to come from outside the region and, therefore, from outside any free trade area.

6. Microeconomics

In the absence of a macroeconomic vision, it is difficult to be specific about what forms of enterprise creation are most likely to produce a sustainable economy. It is clear that Kosovo's economy *282 will flourish in the aggregate only if it produces a substantial and reliable stream of foreign exchange. In other words, Kosovo must be in a position to export goods and services. [FN71] This is only possible in those sectors where it has a comparative advantage.

This is only one aspect of an essential tailoring of economic development policy to the unique circumstances and experiences of the target territory and population:

[T]here is growing evidence that desirable institutional arrangements have a large element of context specificity, arising from differences in historical trajectories, geography, political economy, or other initial conditions. . . . In the words of Douglass North: "economies that adopt the formal rules of another economy will have very different performance characteristics than the first economy because of different informal norms and enforcement." [FN72]

6.1. Which Sectors Are Most Likely To Be Viable?

One can begin an analysis of viable sectors by stepping through the obvious possibilities. The mining sector is one candidate, although it would require large-scale foreign investment. Kosovo historically was a source of raw materials for the rest of Yugoslavia, but its proven reserves for many minerals such as nickel have been nearly exhausted. On the other hand, Kosovo has substantial lignite reserves, with extraction costs estimated to be less than one-third of the level in Bulgaria, the next most attractive source. Its mining facilities, however, are obsolete and inefficient, and some of the largest mines--for metals, not lignite--are the subject of potentially violent conflicts between Serbs and *283 Albanians.

Even though Kosovo once exported electricity, the current poor state of its electricity-generating and distribution systems dims hopes that this is a sector for the future. Some analysts and policymakers favor the idea of a seven- to ten-year concession for an outside investor who could rehabilitate lignite mining facilities, build new high-efficiency generating plants, rehabilitate electric distribution lines running to Montenegro, Serbia, and Macedonia, and earn a good rate of return by exporting electricity. The political risk of this plan would be greatly reduced by the realization of a plan to build a spur from a new 400 kilovolt-amps ("KVA," equivalent to kilowatts) distribution line from Tirana to Podgorica, the capital of Montenegro, that would tie Kosovo's electric grid into the larger European grid through Albania. This would permit it to import and export electricity according to seasonal variations in supply and demand, without being at the mercy of political vicissitudes in Serbia, Montenegro, or Macedonia. The mining, generating-plant, and distribution-line rehabilitation costs could amount to $1 billion.

This approach is superior to mining the lignite and simply shipping it out of the country because the rights of way and some of the physical structures for electric distribution already exist and merely need to be upgraded. In contrast, it would be necessary to build a new railroad or road almost from scratch to transport the lignite itself. Unfortunately, the European Union has blocked a USAID initiative to finance a management contract for KEK that would permit implementation of this approach.

In telecommunications, Kosovo has no more strategic advantage than any one of a number of places. Kosovo does not have an attractive telecommunications infrastructure, except for the broadband wireless network built by Internet Project Kosovo ("IPKO"). The IPKO network is oriented toward domestic telecommunications and is not designed as a transit network for international communications.

Food, lodging, and entertainment certainly are possibilities. Kosovars have proven their capacity to establish restaurants. The food and service are much better than elsewhere in central, eastern, and southeastern Europe, but this sector does not generate any foreign exchange in the absence of tourism to make up for a declining international presence. The attention drawn to Kosovo in recent years, as well as its beauty as a former outpost of the Ottoman Empire and its mountains, could attract some foreign *284 tourists, but only if investment is attracted for that purpose. Additionally, these tourist attractions must be marketed effectively in order to be successful.

Agriculture will require much work to become competitive because of the primitive character of most of the farms, which are very small and located in villages with very poor infrastructure. However, many observers think that white wines [FN73] and potato products hold promise for exports.

Manufacturing is a possibility for any economy, as long as telecommunications and transportation infrastructures are sufficient to support it, and as long as an appropriately skilled workforce with a good work ethic is available. Because Kosovo has at least two of these prerequisites (skilled workforce and telecommunications), wood processing, lumber construction materials, [FN74] metalworking, and textiles and garment making [FN75] can eventually penetrate export markets. Its internet protocol ("IP") telecommunications infrastructure, based on the IPKO wireless data network, is world-class. Its workforce is energetic, self-reliant, and may have the skills for many manufacturing jobs. The transportation infrastructure, on the other hand, is terrible. The country has only one airport, near Prishtina, its rail system has barely begun to operate again along a few routes, and its roads are in marginal condition, although much improved since the war. One of the most useful transportation infrastructure projects, a good highway between Prishtina and Dures, Albania (a seaport), has not begun, due to a combination of passivity by local political leaders and concerns of the international community that this would tie Kosovo too closely to Albania. Building this highway should receive much greater priority.

Some entrepreneurs envision Kosovo building professional service firms that would deliver their services over the internet. Kosovo's comparative advantage is significant because of its high literacy rates. Also important is the number of its young people that have studied outside the country, learned major foreign languages, and picked up competitive professional skills in law, *285 economics, architecture, and technology. It is possible that high-tech incubators could accelerate the formation of such professional service firms.

6.2. The Role of SMEs

In the first conversation the Author had with senior officials of the Interim Government of Kosovo in 1999, he urged emphasis on small and medium enterprise development as the only practicable way to create jobs.

The Bologna Charter 2000 on SME Policies, adopted by representatives from forty-seven countries meeting under sponsorship of the Organisation for Economic Co-operation and Development ("OECD"), [FN76] recognized that "entrepreneurship and a dynamic SME sector are important for restructuring economies and for combating poverty." [FN77] It recognizes that SME competitiveness would benefit from a regulatory environment that does not impose undue burdens on SMEs, education that fosters an innovative and entrepreneurial culture, and effective access to financial services, "particularly to seed, working (sic) and development capital." [FN78] In particular, it recommended that "financial barriers to innovation in SMEs be reduced by: i) facilitating the development of market mechanisms for equity financing, and related services, especially for innovative start-ups . . . ." [FN79] It further suggested that partnerships involving private actors, NGOs, and different levels and sectors of public administration could be helpful, and that self-help organizations such as business associations and technical assistance centers can foster international cooperation and partnership among SMEs and can improve access to information, financial and technological resources, and new markets.

Western Balkan countries, including Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia, Serbia, and Montenegro, adopted the European Charter for Small *286 Enterprises [FN80] at the Thessalonica Summit, in June 2003. Kosovo was not empowered to adopt the charter because Kosovo is not yet a state.

7. Development Theory

The economics profession has recognized that institutions matter in achieving a prosperous private sector. [FN81] Private initiative and incentives are important to economic growth in countries in transition. [FN82] Private entrepreneurial energy is unlikely in the absence of institutional underpinnings of market economies, including a clearly defined system of property rights, a regulatory means for curbing fraud and anticompetitive behavior, social and political institutions that limit risk and manage social conflicts, rule of law, and clean government. [FN83] Effective strategies "of institution-building must not overemphasize best-practice 'blueprints' at the expense of local experimentation." [FN84] Laws not only must be written, they must be "backed up by the use of sanctioned force." [FN85] In property reform, the key characteristic is "'control' rather than ownership . . . . Formal property rights do not count for much if they do not confer control rights." [FN86] Moreover,

[T]he quality of institutions trumps everything else. Once institutions are controlled for, integration has no direct effect on incomes, while geography has at best weak direct effects. Trade often enters the income regression with the "wrong" (i.e., negative) sign, as do many of the *287 geographical indicators. By contrast, our measure of property rights and the rule of law always enters with the correct sign, and is statistically significant, often with t-statistics that are very large. [FN87]

Deep cleavages along ethnic or income lines can impede political decisionmaking and implementation of formal political decisions to the detriment of economic development. The risk is "coordination failure in which social factions fail to coordinate on outcomes which would be of mutual benefit." [FN88] As Dani Rodrik writes, "healthy societies have a range of institutions that make such colossal coordination failures less likely. The rule of law, a high-quality judiciary, representative political institutions, free elections, independent trade unions, social partnerships, institutionalized representation of minority groups, and social insurance are examples of such institutions." [FN89] In other words, strategies for economic development focused on institution-building converge with strategies for developing liberal democracy. [FN90]

Moreover, institutionalist strategies connect nicely with the goal of building "rule of law," as long as "rule of law" is understood to encompass private law as well as public law--a framework for entrepreneurship as well as a framework for human rights.

8. Privatization

Privatization is at the top of the list of most neo-liberal economic reformers. It took a long time to rise to the top of UNMIK's list, however. After much wrangling and delay, the frequently obstructionist legal advisors to the Special Representative of the Secretary General ("SRSG") [FN91] were finally *288 persuaded, in 2002, to allow the establishment of a structure for privatization. This is reflected in UNMIK Regulation 2002/12, which transfers complete control over all of the assets of publicly owned and socially owned property to a new KTA, an agency independent of both UNMIK and local government institutions. [FN92]

The board of the KTA approved its operational plan on February 25, 2003, and identified six SOEs for tender, beginning the privatization process. [FN93] A four-month delay ensued, however, because UNMIK lawyers had further objections to necessary property rights transfers. [FN94] Privatization finally began, with bids received on an initial six SOEs by July 14, 2003. One hundred three bids were received, and another nineteen were due by August 2003, and bids were due on a third group by November 2003.

More than 130 million euros were bid in the second round of privatization, with approximately 23.6 million euros in commitments accepted.

Despite this promising start, a new Deputy SRSG from the EU, Nickolas Lambsdorff, upon arriving in Kosovo in October 2003, "froze" privatization because of concerns and confusion about legal immunity and claims by Serb interests that certain enterprises being considered for tender were not within the jurisdiction of the KTA because they had legally been transformed after 1989. It is unfortunate that this interruption occurred because it creates uncertainty likely to discourage investors. Mr. Lambsdorff appointed a new Managing Director of KTA, Marie Fucci, who insisted on uprooting the conceptually sound operational policies of KTA, and substituting policies that would discourage investment by saddling investors with the uncertain liabilities of SOEs. Local Kosovar governmental institutions opposed the Lambsdorff/Fucci blockages to privatization, pointing out that their positons conformed substantially with those of Serbia, which opposes privatization altogether.

The concept of Regulation 2002/12 is sound: it strips liabilities *289 from the assets of publicly owned and socially owned enterprises, thus allowing the assets to attract private investment capital, while the claims against those assets must be asserted before the KTA. Private investors acquire the assets of these enterprises by bidding in an open-tender process. The amount of the successful bid is paid to the KTA, which then holds those payments in trust for claimants. Conceptually, the KTA approach builds a wall between the assets and the investor, on the one hand, and the liabilities on the other. This is necessary in order to attract private investment to any of these enterprises because of the complexity of the claims.

The model resembles that used by the U.S. Congress to save the Northeast and Midwest railroads after bankruptcy proceedings proved inadequate. Under the Regional Rail Reorganization Act of 1973, [FN95] the United States Railway Association, roughly analogous to the KTA, decided which properties should be preserved for rail transportation and which need not be. The rail properties were conveyed to a new federally chartered private corporation, Consolidated Rail Corporation ("Conrail"). [FN96] The other properties remained in the estates of the bankrupt railroads. The estates received stock in Conrail plus $500 million in government-guaranteed bonds. [FN97] In subsequent litigation, the Supreme Court of the United States determined that no unconstitutional taking of property without just compensation had occurred because the estates were entitled to litigate the fairness of what they received for their property in the United States Claims Court. If that court determined the amount to be inadequate, it could award a deficiency judgment against the U.S. government under the Tucker Act. [FN98]

The Kosovo privatization process differs in two respects from the Regional Rail Reorganization process in the United States. First, the Rail Act covered only one industry; the Kosovo privatization process covers all SOEs. Second, the Tucker Act remedy against the U.S. government provided far more reliable compensation for any deficiency in value of properties than is present in the Kosovo privatization scheme. The U.N. has asserted *290 immunity from any recovery. The local Kosovar government has uncertain creditworthiness. The uncertain nature of judicial remedies for inadequate compensation or other violations of rights associated with the privatization process is a further distinction. [FN99] Still, disputes are inevitable in any privatization or other corporate reorganization process. The designers of the privatization process for Kosovo recognized this reality and established the Special Chamber of the Supreme Court of Kosovo with exclusive jurisdiction to resolve these disputes. To avoid local bias, international judges decide cases filed in the Special Chamber.