By: Beqir Lahu
A weak performance in foreign trade with internal reasons
Kosovo has provided mostly negative macroeconomic trends in recent years. It has a high
level of unemployment and inflation, a decrease in foreign direct investment and a
disastrous ranking in international reports, such as on the perception of corruption and the
environment for doing business. But none of the macroeconomic indicators has done notably
worse than the foreign trade balance. This indicator summarizes the exchange of goods and
services of Kosovo with other countries. According to the Statistics Agency, Kosovo’s trade
deficit in 2011 has reach 1.86 bn. Euros. This means that Kosovo imports 1.86 bn. Euro
worth of goods and services more than it exports.
This condition is greatly influenced by the lack of a strategic orientation from the
government, but also from the private sector. On the Government’s site we note a lack of a
clear political will and long-term strategic plans on how to direct the economy to export
more. Domestic manufacturers on their side seem to be too busy with internal problems
rather than directed towards foreign markets, where they could launch their products. Even
the companies with a solid stock of assets and financial capital, have to face a shortage on
human capital. This capital is desperately needed to address numerous challenges and to
cope with competitive products. Well educated manager, could be able to introduce quality
management initiatives more broadly, launch products and build sustainable relations to
their customers
Another problem is the lack of manufacturing capacity. Even if Kosovo would have a
strategic plan and an economy oriented towards export, it would still lacked the
technological infrastructure and human capital that would use the equipment and
manufacturing machinery in a productive way. The privatization of socially owned enterprise
(SOE) hasn’t brought the economic revitalization to the expected extend whereas the recent
economic conditions have demotivated other entrepreneurs to invest further in new capital.
On the other side the Vocational Education and Training (VET) system (and the education
system in general) is still not sufficiently matching the needs of enterprises for workforce,
equipped with the necessary skills the labour market demands.
These and other reasons have contributed that Kosovo is being perceived as an unfavourable
economic environment. This perception is primarily expressed in the World Bank report
(Doing Business) and in the Transparency International’s report on the perception of
corruption in public offices, which both ranked Kosovo at their bottoms of their lists. Foreign
investors consider these rankings in taking decision whether to invest in a certain country or
not. The lack of Foreign Direct Investments (FDI) impairs the problem of manufacturing
capacities, because investors often will be more willing to invest, if there is already
something on the ground. Or at least they will tend to search for such an opportunity. This
vicious circle of lack of capital, unfavourable economic environment, lack of FDIs and so lack
of capital remains a big challenge for the economy.
But what does a trade deficit mean for the economy? There are two recognized economic
thoughts. Those who thing that a high trade deficit in the long run is harmful, depart from
the premise that a country with a high trade deficit will have to borrow more capital or sell
state assets to finance purchases of goods and services. This jeopardizes the productivity in
the long run because financial capital is not being used to create or replace capital or
infrastructure which is necessary to increase productivity (or at least to maintain an equal
level). Trade unions in principle often oppose high trade deficits. This is because they believe
that when imports exceed exports, jobs are being lost to foreign competitors. On the first
glance, a seemingly logic explanation, but economic data from various studies do not show
any connection between trade, or trade deficit and rising unemployment. This lesson is
learned as well for the implementation of the North American Free Trade Agreement
(NAFTA) in the mid 90’ between North American countries. Although the United States (US)
began to accumulate a high trade deficit, the labour market showed no signs of weakness.
The second attitude is represented by those who thing that a negative trade balance is no
reason to worry, argue that the economy of a country with a negative trade balance is
growing faster that its trading partners. This growth attracts investors, who bring money.
This money provides more consumption and therefore more imports. Another argument,
which applies to countries with independent currencies, such as the US, proclaims that the
money which is drawn out of the economy must necessarily return in form of investment in
U.S Treasury bonds, shares or other investments. This makes sense because Japanese car
manufacture will have to pay its workers in Yen, and not US dollars. So they will tend to
exchange from trade gained dollars with yen on the world market. This will make sense to
the US, but what about Kosovo?
Can Kosovo hope on such a return of investments, without even having a stock exchange?
Does the economic growth attracted investors who have increased the purchasing power
which resulted in more commodities being imported? Frankly spoken, the answer is no.
According the World Bank, the GDP growth rate of Kosovo was 4% in 2010, which is below
the necessary level to generate jobs and thus significantly increase purchasing power. This leads to the conclusion that the trade deficit is almost pure export of cash which is primarily
funded by government spending and secondly by remittances of our compatriots.
Kosovo desperately needs a clear political resolution on the economic orientation. This is
partly made due to the existence of the Bansko Plan, but if this plan does not bring with it
structural reforms and concrete actions by the government, then it will be difficult to fight
Kosovo’s trade deficit. But this is not enough. It should be followed by bold action in the
sphere of good governance and corruption. Doing business is being tremendously affected by
those spheres. In both areas, political and economic, Kosovo can use best practices form
other countries. Here it should also gain from expertises made by international consulting
companies. Even OECD countries utilize such expertise, despite their developed government
capabilities. Then through task forces the government may review legislation and eliminate
barriers that appear in different areas.
To motivate the private sector to make new investments in capital, the government should
loosen companies from taxation in the amount of that investment. This action should be
limited in time and for certain sectors. Moreover, the implementation requires control and
rigorous criteria in order to avoid economic side effects and individual abuse of taxes. The
government, especially the Ministry of Trade and Industry (MTI) should build a regional
network of offices to directly support small and medium size enterprises (SME). This action
can be performed with high efficiency, if left to be implemented by any organization that has
experience in this regard. MTI in cooperation with the Chamber of Commerce should
establish quality standards and safety certifications for Kosovan products. This would be the
first step towards the adaptation of the CE (or similar) certification that binds European
manufactures to declare their products comply with European Union directives. The
government could create a security fund in cooperation with insurance companies, which
would cover eventual payment defaults or other complication. In regard to promotion of
economic cooperation between Kosovo and other countries, Kosovo should use Embassies,
Chamber of Commerce and Cultural Centres. This action should follow two goals. The
Kosovan Diaspora can serve as an important source of capital and conversely it may be an
attractive market for Kosovan products. A good practice to learn from is provided by the
Italian economy which exports a wide range of products right to its Diaspora in the US.
The private sector, in turn, must redefine his heading direction to address the challenges of
recent developments. It should leave old think patterns right where they belong – namely to
the past – blaming the government for all the difficulties. It may do well in seeking a way of
cooperation with the government intending to apply a neo-corporative approach. Enterprises
should seek inclusion during drafting business legislation from the early stages. They should
work harder in gaining internationally recognized certification for their products and
workers, so they can sell these products and compete in international tenders.
Finally it remains to say that the trade deficit remains a major challenge which is closely
related to internal factors. But it is known that wherever there are challenges, opportunities
are not far away. It remains the work of all parties involved to discover and exploit these
opportunities.
