The Basket Case Called Kosovo

Don't be fooled by the capital's U.N.-fueled growth. The economy is in deep trouble

The central police headquarters in Pristina, the capital of Kosovo, is still a bombed-out wreck, but new businesses have opened up all around. There are bars, restaurants, travel agencies, Internet cafés, and even a Thai massage parlor. Five years after a NATO-led bombing campaign swept the Yugoslav army out and U.N. peacekeepers in, this once-dusty backwater has been transformed into a booming mini-metropolis. The population has more than doubled, to 500,000, and every day new migrants arrive from the countryside.

But don't believe this is a real boom. The massive U.N. presence in Kosovo has created an artificial bubble in Pristina and a few other spots scattered around the province, while the rest of the economy languishes. Foreign investment is practically nil, unemployment runs as high as 70% in some areas, and imports are outpacing exports by 26 to 1. And now the Kosovar economy is starting to slow, from 4.3% growth last year to an expected 4% this year, as the U.N. scales back its presence and as international donors withdraw. Of the $2.9 billion in aid committed, only $2.2 billion has materialized.

Policymakers in the U.S. and at the U.N. wonder if they can ever heal such broken nations as Afghanistan and Iraq, given enough time and money. Well, the case of the much smaller Kosovo does not provide much encouragement. Even the passage of five years has done little to heal the wounds of this economy.

Joblessness and pervasive poverty only add fuel to the ethnic tensions that cleave this fitful province of 1.9 million. The rifts were in full view in March, when three days of rioting by Kosovar Albanians forced some 4,000 Serbs and Roma from their homes. The Serb minority responded by boycotting the Oct. 23 parliamentary elections, raising fresh doubts about the U.N.'s policy of ethnic reconciliation.


For Kosovo's international caretakers, the link between political stability and economic development grows clearer by the day. "The March riots refocused policymakers in Brussels and Washington," says Nikolaus Lambsdorff, the European Union official who heads the U.N.'s economic policy unit in Kosovo. "People have begun to realize how bad the economic situation is."

It's easy to blame the U.N. for mismanaging the reconstruction. But long before the international community came to town, Kosovo was already mired in poverty. Back in the days when Yugoslavia was still a country, Kosovo consumed 80% of the total federal development aid. With a per capita income of $1,100 a year, Kosovo is by some estimates the poorest province in Europe.

In many ways, Kosovo looks doomed to failure. It is landlocked, with crumbling infrastructure and hopelessly outdated factories. But perhaps Kosovo's biggest problem is demographics. Its population, which is 90% ethnic Albanians, has tripled in the past five decades. In addition to being the fastest-growing population in Europe, it's also the youngest. More than half of its citizens are under 24, and almost one-third are under 15. "Could you imagine if the population of France had tripled in 50 years?" asks Dusan T. Batakovic, an expert on Kosovo and now the Serbian and Montenegrin ambassador to Athens. "Do you think it would be as rich as it is now?"

The local economy is groaning under the strain of this baby boom. The 40,000-odd job seekers that enter the market each year face few prospects. The farm sector, which still accounts for about two-fifths of all jobs, cannot absorb them all. The promise of a government job or a post with one of the international agencies lures many to Pristina. The capital is also the center of a thriving black-market economy that encompasses everything from smuggling to prostitution and drug trafficking. "I came to Pristina after the war because I thought there would be opportunities," says Esat Krasnici a 43-year-old taxi driver who moved his wife and three children back from Germany in 2000. "I think it was a mistake."


Like the rest of Eastern Europe and its neighbors in the Balkans, Kosovo is trying to make the transition from a socialist past to a free-market future. One of the main obstacles is its twilight legal status. Kosovo is not quite a province of Serbia, and not quite an independent nation. Rather, it's a de facto protectorate of the U.N. Officials in New York and Pristina spent months trying to figure out who owned what before embarking on a drive to privatize more than 400 state- and worker-owned companies in 2003.

Because of Kosovo's unresolved political status, the government in Pristina remains cut off from international capital markets. Nor can it reap the financial benefits that come with membership in international institutions such as the World Bank or the International Monetary Fund. And while Kosovo's future ultimately lies within the European Union, for the time being it has no access to the funds that the EU doles out to prospective members, which helped Greece and Portugal develop. "How do you get an economy moving when you don't have access to international capital?" asks Soren Jessen-Petersen, the newly arrived head of the U.N. mission in Kosovo.

That isolation could end soon. After five years of trying to manage Kosovo, the U.N. has committed itself to opening talks on the province's final status sometime next year. There are three options: Kosovo could remain an autonomous province of Serbia; it could be divided along ethnic lines; or it could become an independent country. The first is improbable, since it would almost certainly lead to another war. Partition would satisfy no one. The most likely outcome is independence.

That should help. So should the raft of laws, regulations, trade agreements, and financial structures that the U.N. has put in place to establish the foundations of a modern economy. But it will be years before the mirage of prosperity in Pristina becomes reality.

By Alkman Granitsas in Pristina

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