11. Multi-dimensional analysis of development in Kosovo

This chapter of the MDR of the Western Balkans identifies the key capabilities and most pressing constraints in Kosovo by linking economic, social, environmental and institutional objectives. The assessment is organised around five thematic sections based on the five pillars of the 2030 Agenda: People, Prosperity, Partnerships and financing, Peace and institutions, and Planet. Whenever relevant, Kosovo is compared with a set of benchmark economies in the region (Albania, Bosnia and Herzegovina, Montenegro, North Macedonia and Serbia), the OECD (Costa Rica, Czech Republic, Greece, Slovak Republic, Slovenia and Turkey), non-OECD economies in the European Union (Croatia and Romania) and non-OECD economies in other regions (Kazakhstan, Morocco, Philippines and Uruguay). It includes regional averages for the Western Balkans and OECD and EU members.

The People pillar of the 2030 Agenda for Sustainable Development places quality of life centre stage, focusing on the international community’s commitment to guaranteeing the fulfilment of all human beings’ potential in terms of equality, dignity and health. After the war, Kosovo achieved tangible improvements for its citizens: household consumption rose, poverty declined and important healthcare, gender equality and employment legislation was put in place.

However, there is a long way to go. Capacity to move forward on implementation of reforms and enforcement of legislation is low. The striking regional inequalities in basic infrastructure and well-being between minority communities and the general population need to be reduced. Kosovo’s formal employment rate is among the lowest in the world, with the large young labour force and women especially affected by a lack of opportunities. There remains room for improvement in terms of building up effective education, health and social protection systems. The People section in this chapter identifies five major bottlenecks to the well-being of Kosovo’s population (Table 11.1).

Household consumption has almost doubled alongside GDP growth since 2006, and poverty rates (USD 5.50 [United States dollar] per day) have more than halved since 2005. Nevertheless, poverty, mainly driven by high unemployment and low wages, remains very high compared to benchmark economies, with 18% to 21% of the population living under the national poverty line (according to national and international estimates, respectively). Some 5% of the population experienced extreme poverty in 2017 (Figure 11.1) (Kosovo Agency of Statistics, 2019[1]). The impacts of COVID-19 on poverty are likely to be substantial, as economic activity in Kosovo has been brought to a standstill and remittances have plummeted. Recent simulations suggest that the poverty rate will rise by between four and ten percentage points going forward (World Bank, 2020[2]).

Quality of life depends on a household’s location among Kosovo’s seven regions. Income inequality, as measured by the disposable income Gini coefficient, is slightly below the OECD average of 31.1, although it has increased since 2016, according to national estimates (Kosovo Agency of Statistics, 2019[1]; Solt, 2019[3]). Regional differences, particularly regarding access to water, sewerage systems and power supply, are striking (Table 11.2): about 42% of villages are connected to piped water in Mitrovica, compared to more than 85% in Priština or Peć. Mitrovica also has poor access to sewerage and relatively unreliable power: six out of nine municipalities have issues with access to electricity. Apart from Priština, the four regions with the poorest connections to the water and sewerage systems (Gnjilane, Gjakova, Peć and Mitrovica) also show higher infant mortality. Since 2009, social welfare funds have been allocated through a general grant without any clear earmarking in relation to the local budget available for social services, which has led to considerable variation in social services delivery across municipalities (European Commission, 2018[4]).

Ethnic communities in Kosovo continue to face social and political exclusion and worse well-being outcomes than the rest of the population. Kosovo is a multi-ethnic society, which apart from Albanians and Serbians, includes Roma, Ashkali, Egyptians, Bosniaks, Turks and Gorani. The 2011 Census, which excluded North Kosovo, estimated a total of 8 824 Roma, although 2010 Organization for Security and Co-operation in Europe (OSCE) estimates suggested that there were around 34 000. Unemployment rates among Roma, Ashkali and Egyptian communities are about 90% (European Commission, 2019[7]). Personal documents of many community members were destroyed during the conflict or are not recognised by local authorities, since Kosovar and Serbian administrations both require their own documents before allowing access to public services. Children living in rural areas are less likely to have access to good health care; and access is even worse for ethnic minorities. Only three in ten Roma, Ashkali and Egyptian children are fully immunised against measles, and more than 60.0% lived in absolute poverty and over 30.0% in extreme poverty in 2014 (compared to the average statistics of 48.6% and 18.9%, respectively) (UNICEF Kosovo Office, 2014[8]). The government approved the Strategy on Children’s Rights 2019-2023 in January 2019 and recently developed a child and maternal indicators framework to monitor children’s rights, but child labour remains prevalent: about 10.7% of children, many from ethnic minorities, are involved in work, including in agriculture, mining, construction and manufacturing but also in commercial sexual exploitation – sometimes as a result of human trafficking – and street work (European Commission, 2019[7]; Refworld, 2017[9]). A systemic solution and an institutional response to child begging and child marriage, especially among Roma and Ashkali children, is lacking. Although Roma, Ashkali and Egyptians have a total of four reserved seats in the Kosovo Assembly, they remain excluded from real participation in political life and discussions on the future of Kosovo (Minority Rights Group International, 2018[10]).

Despite relatively progressive legal frameworks, lesbian, gay, bisexual, transgender and intersex (LGBTI) communities face continued discrimination and harassment. Kosovo’s constitution is one of only ten in the world that ban discrimination on the grounds of sexual orientation (Art. 24). The definition of marriage remains liberal, making no reference to gender and thus allowing for cases to be brought forward in the constitutional court. In 2013, the Law on Protection from Discrimination was updated to include discrimination based on gender identity. Nevertheless, society overall remains conservative, and LGBTI communities are largely invisible in public life (e.g. there are no public gay bars) and face high levels of verbal abuse and harassment. According to a 2015 population survey, 41% of the population believed homosexuality is a sickness and would try to help their child find a cure if they found out he or she was not heterosexual (Kosovo Agency of Statistics, 2020[5]).

The employment rate in Kosovo is among the lowest in the world. While it increased from 25.5% in 2012 to 30.1% in 2019, it is below Yemen, which has the lowest employment rate among all economies with available data in the ILOStat database, and well below the Western Balkan and OECD averages (42.7% and 57%, respectively) (World Bank, 2020[6]). Unemployment rates in Kosovo are among the highest in the region, and almost six in ten unemployed have been without work for a year or longer (European Commission, 2019[7]). The COVID-19 crisis will likely have an additional negative impact on jobs, with those on fixed-term contracts, seasonal workers and workers in the informal economy and the construction sector particularly at risk.

Youth integration in the labour market is a strategic objective but remains a significant challenge in practice. In 2019, more than one-third of young workers were not in employment, education and training (NEET), the highest share among Western Balkan economies and almost triple that of the average OECD economy (Figure 11.2). Indeed, youth disenfranchisement is a key driver of fragility in Kosovo today. Poor integration into the labour market can be detrimental to young people, as they risk losing motivation and skills and migrate abroad for better employment opportunities. Alongside Bosnia and Herzegovina, North Macedonia and Serbia, Kosovo is an important place both of origin and of transit for migration. Transit migration was particularly important in the 2015-16 surge of asylum seekers to European OECD countries. It has since declined significantly but continues on a more modest scale. Austria, Germany, Slovenia and Switzerland are the main destination countries of emigration from Kosovo, although the nature of migration has changed over time. Managed labour migration to Germany in particular has increased in recent years through a scheme that facilitates labour migrants from the Western Balkans. In total, around one-third of Kosovo’s national population lived abroad in 2017 (World Bank, 2017[12]).

The government has placed women’s integration in the labour market high on the economy’s agenda, both as part of its Strategy on Employment and Social Welfare 2018-2022 and as a priority area for the recently established Employment Agency. It remains to be seen how much will be implemented. There are significant differences in labour market participation between women and men. Almost 80% of women in Kosovo were inactive in 2019, one of the highest rates in the world (Figure 11.2). Despite a solid legal framework for women’s right (Law on Protection from Discrimination) and a dedicated Agency for Gender Equality, discrimination against women at the workplace and poorly developed maternity and parental leave policies financed by employers rather than the public sector remain issues (Jose et al., 2017[13]; European Commission, 2019[7]). Over half of inactive women cite family reasons as the main cause of inactivity, although rates are lower for women with tertiary education, who also show higher overall employment rates (Figure 11.3). The current lack of care leave, flexible working arrangements and limited elderly and childcare facilities act as additional barriers. For example, in 2017/18, only 4% of children aged 0 to 5 attended public preschool education, including kindergartens and nurseries (World Bank, 2017[14]; Thaçi, Rraci and Bajrami, 2018[15]). Given Kosovo’s poor performance in the recent OECD Programme for International Student Assessment (PISA), investing in early childhood education would enhance longer-term human capital development.

Besides tackling Kosovo’s general lack of employment opportunities (see the Prosperity section in this chapter), effective labour market institutions and policies focused on closing skills gaps can be important levers to address the demand side of the labour market.

Labour market activation policies in Kosovo are underdeveloped and underfunded. Although the recent establishment of Kosovo’s Employment Agency is an important step, poor coverage, lack of resources and weak collaboration with other institutions limit its activation potential. Public funds for active labour market programmes account for about EUR 2 million per year, or 0.03% of GDP, compared to an OECD average of 0.42% (World Bank, 2019[17]). Only 56.5% of all unemployed had registered at the agency in 2019, and there remains a gender gap in service provision, with only 34% of participants in active labour market measures being women (World Bank, 2018[18]). Almost half of job seekers have no formal education or only primary education and could benefit from well-targeted upskilling and reskilling, a pattern seen across the labour force overall (Kosovo Agency of Statistics, 2020[5]) (Figure 11.3).

Weak labour market institutions, skills mismatches and a large supply of workers have resulted in high rates of informality, hiring reliant on personal contacts (see Prosperity section in this chapter) and poor working conditions for many. Average weekly working hours in formal work are well above the regional and EU averages, the likelihood of which is increased by the fact that the majority of workers hold temporary contracts (Figure 11.4). About 18.1% of all formal employees work more than 50 hours per week, more than double the OECD average of 7% in 2018 (OECD, 2020[20]). In many sectors, workers do not receive financial compensation for long working hours, due to either lack of employer adherence to working contracts or lack of work contracts all together. While low labour demand and high labour supply provide scope for such abuses, inadequately designed labour law, the weak capacity and efficiency of labour inspectorates and non-existent trade unions intensify the issue (Jakurti, 2020[21]). Labour inspectorates lack human and financial resources and technical equipment (inspectorates still use paper documentation for internal processes), and limited collaboration with other relevant institutions, such as tax authorities, leads to uncoordinated and extensive visits to businesses, which encourages informality (World Bank, 2017[14]). Work safety should also be monitored. With six fatal accidents per 100 000 employees in 2019,1 Kosovo outnumbers some other benchmark economies in terms of occupational safety: Croatia recorded 1.8 fatalities per 100 000 employees in 2015, the Slovak Republic 1.7 in 2014 and Greece 1.3 in 2014.2

Kosovo’s education system fails to equip people with job-ready skills. The economy’s performance in PISA is very low (Figure 11.5). An employer survey suggests that lack of appropriate skills and experience are primary constraints to recruitment at all skill levels.3 Skills gaps and mismatches are accentuated by limited training provided by firms and missing links between companies and the education system. In 2017, Kosovo spent 4.4% of GDP on education, up from 3.4% in 2008 (Kosovo Agency of Statistics, 2020[5]) which is not significantly lower that than the OECD average (5.1%), indicating potentially inefficient use of funds (World Bank, 2020[6]). Kosovo’s education system tends to focus on top performers and neglect others, affecting equity, which in turn influences the participation in the education system of various groups, including women and ethnic minorities.

Poor education outcomes reflect the low quality of primary and lower secondary education, which owes to a lack of local capacities, including quality assurance and a mismatch between the requirements of the new competence-based curriculum and teaching skills. Directorates for Municipal Education, to which responsibility was decentralised a decade ago, and schools need more capacities and resources to implement quality assurance processes, such as school self-evaluation, teacher and school leader evaluation and student assessments (Aliu, 2019[25]). Many school-level quality co-ordinators reportedly lack a clear understanding of their roles, and not all carry out their responsibilities (Thaçi, Rraci and Bajrami, 2018[15]). A competence-based curriculum was adopted about ten years ago and became mandatory as of 2018, but implementation is lacking, and teachers have been resistant. This relates to insufficient training (only about 40% of teachers were trained to implement the new curriculum), lack of up-to-date textbooks and insufficient science staff, despite salaries that exceed average incomes (Aliu, 2019[25]).

Skills gaps and mismatches are also attributable to the weak vocational education and training (VET) system. Although more than half of upper secondary students are enrolled in VET (about 53% in 2018) (Kosovo Agency of Statistics, 2020[5]), the system is characterised by an education offer not aligned with labour market needs, poor collaboration with the private sector and weak quality assurance mechanisms (World Bank, 2019[17]). VET students have the option of enrolling in academic tertiary programmes. The VET system must therefore prepare students for both tertiary education and the labour market, likely resulting in students underequipped for either. About 77% of hiring firms encountered difficulties due to skill gaps (Figure 11.6), compared to 55% in Albania, demonstrating the poor quality of VET in Kosovo. Lack of higher and medium to lower skills is particularly pronounced in agriculture and industry, and business services.

Despite improvements in health outcomes in recent years, Kosovo has a long way to go. Many health and nutrition indicators, particularly those related to maternal and child health, lag behind regional and international benchmarks. At 72.5 years, life expectancy in Kosovo is the lowest in the Western Balkans, and infant mortality, mostly caused by perinatal conditions, respiratory diseases and diarrhoea, is the highest in Europe (Figure 11.7). Data from 2010 showed that 15.7% of school-aged children and 23.0% of pregnant women had mild anaemia, and one-sixth of children were stunted (UNICEF, 2010[26]). A more recent study found that the diets of a small sample of kindergarten children were deficient in several micronutrients (Rysha, Gjergji and Ploeger, 2019[27]). Improvements in primary health care – a Ministry of Health stated priority in the 2017-21 health sector strategy – should include educating families and communities about adequate homecare management, nutrition, child physical and cognitive development and general reproductive health. There is currently no legislation on nutrition and physical activity.

Although tuberculosis (TB) cases declined by 3.5% annually in 2002-17 (mainly due to large grants by the Global Fund to Fight AIDS, TB and Malaria), Kosovo has one of the highest TB rates in Europe, with almost 40 new cases per 100 000 population per year (WHO, 2013[28]; Bajrami et al., 2019[29]; European Centre for Disease Prevention and Control/WHO, 2019[30]). High rates of tobacco use – 37.4% of men and 19.7% of women in Kosovo smoke daily – are contributing factors and, apart from their known implications for cardiovascular disease and lung cancer, have been associated with more severe COVID-19 cases (Vardavas and Nikitara, 2020[31]; Gashi, Berisha and Ramadani, 2017[32]). Kosovo has a comprehensive Law on Tobacco Control; however, enforcement has been weak due to lack of political will and the poor performance of implementing authorities (European Commission, 2019[7]).

Kosovo’s healthcare system needs substantial investments for infrastructure, equipment and urgent staff costs; it is imperative to increase funding, despite the immediate pressure to cut health funds due to the economic downturn. At 1.6% of GDP in 2016, Kosovo’s healthcare expenditures are the lowest of all benchmark economies and represent only 40% of the total annual needs for public health care. More than two-thirds of expenditures are allocated to fixed costs (European Commission, 2018[4]; World Bank, 2020[6]). In many public municipal health centres, healthcare workers list basic resources (e.g. space, heating, water, beds, medical equipment, computers) as missing, and drugs, even those on the essential list compiled by the government, are often unavailable, particularly in rural areas. The shortage of essential medication includes modern contraceptives, which only 11% of women report using (Kosovo Women’s Network, 2016[33]). In terms of specialised services, there are only two magnetic resonance imaging machines in the entire public health system, leading to long waiting lists. In a recent population survey, three-quarters of patients said that they were forced to seek treatment in private clinics because interventions, such as computerised tomography scans, were unavailable (Kosovo 2.0, 2018[34]). As in all economies in the region, many doctors and nurses in Kosovo migrated to work in Western Europe. In a recent poll, 73% of medical students said that they would leave if they were given the opportunity (Elton, 2018[35]). Telemedicine is one way to deal with staff shortages in remote areas and might be especially appropriate for easing pressure on the healthcare system during the COVID-19 pandemic.

Access to health care in Kosovo depends on how much a patient can afford to pay or wait for a procedure. Many end up forgoing preventative checks and treatment altogether. Without publicly available health insurance, citizens bear an estimated 40% of total healthcare costs OOP, compared to an average of 13% in the OECD (Kosovo Women’s Network, 2016[33]; World Bank, 2020[6]). In a recent population survey, 54% of respondents had never had a general health examination, and only 26% had a doctor when needed in the previous year, citing financial barriers (Kosovo Women’s Network, 2016[33]). Corruption is also widespread. Doctors often illegally refer patients from public health to the private clinics in which they work. In 2015, close to one-third of the population admitted having used personal connections or given money or goods to healthcare staff for better services (payments average EUR 63 but can go as high as EUR 600) (FOLlëvizja, 2016[36]). Although legally prohibited, collusion between doctors and pharmaceutical companies is common. Existing drug regulations need to be better enforced, for example via inspections, given a high prevalence of pharmacies selling medication without prescription (Kosovo Women’s Network, 2016[33]).

The highly anticipated Health Insurance Fund announced in 2014 needs to be implemented and sustainably financed as important steps towards universal access. The law foresees mandatory enrolment, paid for by up to 3.5% of salaries by both companies and workers. So far, very few details, including information for trade unions and business, have been made public. Transparent communication with all stakeholders will be essential for an eventual launch (Jaha, 2019[37]; Fazliu, 2017[38]). As health costs can affect poverty, the reform should consider financial risk protection. While there seems to be consensus on developing an outpatient drug benefit scheme and on exemptions from premium contributions relying on a combination of means testing and proxy means testing, relevant parameters need to be finalised (World Bank, 2018[39]).

Kosovo’s social protection expenditure is growing but remains low by international comparison. Total social protection expenditure, almost entirely financed by government revenues, grew by four percentage points in 2005-16 but remained below 9% of GDP, compared to the European average of 28%. There are no typical social insurance institutions, apart from the not-yet implemented Health Insurance Fund, or other insurance schemes providing protection against typical social risks, such as unemployment, workplace disability or sick leave. The two programmes with the largest scope are the universal old-age pension and the social assistance scheme that targets households (the only programme targeted at poverty reduction in Kosovo).

Kosovo’s tiered pension has recently been extended beyond a basic pension via special schemes for multiple beneficiary groups, many of which constitute powerful interest groups (e.g. former socialist workers, war veterans). This has reduced the equity of social protection and driven up costs. Now, 95% of pensions are financed by general taxes. Some 5% of Pillar I pensioners were unlawfully working or receiving double tax-financed pensions in 2017, and many war veterans exit work to become eligible for benefits. Interest in reform of the insurance model is growing. In November 2018, the Ministry of Labour and Social Welfare proposed a substantial pension reform that would add a pay-as-you-go insurance model whereby current worker contributions pay for current pensions (ESPN, 2018[40]). The proposal would end layering of pensions by establishing universal rules and increasing the income of (average) pensioners. Coverage of the old-age population would remain at 100%, but the basic pension would only be issued to those with incomes under 60% of the median. If accepted, this reform would substantially reduce the short-term burden on the national budget and contribute to decreasing inequality among pensioners. It will be important to prioritise the new model to avoid the implementation delays affecting other reforms (e.g. health insurance).

There is substantial scope to improve the coverage, benefit levels and design of social assistance, especially during the COVID-10 pandemic. The above-mentioned expansion of programmes targeting population groups has crowded out social assistance spending aimed at the poor, which is low and declining. In 2016, spending on the last-resort social assistance scheme (SAS) amounted to 0.48% of GDP, down from 0.69% in 2009. The number of beneficiaries also declined, from over 40 000 households in 2005 to 26 000 in 2017. SAS coverage in 2016 stood at 35.5% for the lowest income quintile, leaving many poor families unassisted, while transfers resulted in only a 1.7 percentage point reduction in poverty, which is less than the regional average reduction of 3.9% and half the reduction observed in the European Union (World Bank, 2019[41]; ESPN, 2019[42]). The government should consider expanding coverage by eliminating categorical eligibility criteria (e.g. exclusion of poor families without children under age 5 or orphans under age 15, or those with more than one individual able to work), which are inexact proxies and disincentives to labour participation. Such criteria should be relaxed and admission procedures for social assistance streamlined, especially during the COVID-19 pandemic. Options for universal means testing and in-work benefits are currently being explored in collaboration with donors, such as the World Bank. Investments in functioning social registries will make targeting easier and save resources in the long term for any social protection scheme.

Kosovo has a progressive and advanced Law on Gender Equality codifying equal opportunities for men and women in political, cultural and social life, but men continue to dominate decision making in politics and the private sector. Only 9% of firms in Kosovo have a female top manager, compared to 17% in the OECD (World Bank, 2020[6]). Although at least one-third of seats in national and municipal assemblies are filled by female MPs, as required by a gender quota (putting Kosovo on par with the OECD average), all national parliamentary groups in the previous legislature were chaired by men, and no local council is currently run by a woman (Halini, 2019[43]).There are encouraging signs for change: under the government formed in early 2020, six women were elected to leadership posts – the highest share since the end of the war – including the first female speaker of the assembly (Plesch, 2020[44]). At the time of writing, the gender composition of the new government remains to be determined.

Institutional governance to improve gender mainstreaming in all policies could be further improved. Once developed by ministries, newly proposed laws are shared with the Agency for Gender Equality to ensure gender sensitivity. However, comments are rarely taken on board. The agency’s earlier involvement in the development of legislation or greater gender mainstreaming capabilities in government agencies themselves would be preferable.4

Social cohesion in Kosovo has come a long way over the past two decades, moving from violent conflict to international intervention and a transatlantic military presence (North Atlantic Treaty Organization Kosovo Force), a unilateral declaration of independence accepted by the International Court of Justice in The Hague and the signing of the Brussels Agreement in 2013. Yet, divisions along ethnic lines remain in Kosovo, in common with the rest of the Western Balkans. Although apparent elsewhere, tensions between Kosovo Albanians and Kosovo Serbs (the largest ethnic minority at around 8% of the population, according to 2013 data) are most manifest in northern Kosovo, where the influence of Serbia is strong. While Kosovo has achieved some degree of political integration, social, cultural and economic integration is minimal, and communities effectively live side by side (UNDP/FBA, 2019[45]).

Apart from needed political leadership to overcome tensions and initiate a general reconciliation process, Kosovo’s youth in particular need to be sensitised to issues of transitional justice and dealing with the past. According to a recent workshop series on social cohesion, Kosovo’s youth perceived themselves to be excluded from political processes and how the future is shaped (UNDP/FBA, 2019[45]). Kosovo’s education system is characterised by poor inclusiveness and a design that limits contact among ethnic groups. Serbian and Albanian ethnic groups have much higher levels of education than other communities (World Bank, 2019[17]). Textbooks in Serbian and Albanian schools differ in their narratives about the war. The government should invest in developing uniform materials or presenting the interpretations of both sides to illustrate the subjectivity of history (Haxhibeqiri, 2020[46]).

The Prosperity pillar of the 2030 Agenda for Sustainable Development calls for more broad-based growth that can be shared by all people. The relevance and importance of this goal for Kosovo cannot be understated in light of the strong growth performance and very weak employment and productivity growth in the past decade.

As a relatively young economy, Kosovo is in the process of building the foundations for sustainable economic development. With a narrow productive base, low employment, widespread informality, high emigration and strong reliance on remittances, Kosovo has faced a challenging reform agenda over the past decade. Policies aimed at improving the business environment, strengthening domestic institutions, improving governance and narrowing the infrastructure gap have provided a much-needed boost to investment and exports in recent years. However, progress is needed on all fronts to ensure sustainable and job-creating economic growth.

Kosovo needs to accelerate the transition to a more sustainable economic model driven by productivity-enhancing investment and exports. The economy must continue to implement reforms aimed at improving the business environment, reducing corruption and strengthening contract enforcement. It needs to improve the sustainability and reliability of its energy supply through increased generation capacity, connectivity, energy efficiency and pricing more reflective of costs (Table 11.3).

Over the past decade, Kosovo’s economy has grown at an average annual GDP growth rate exceeding 3.5%. The economy grew largely on the back of rising domestic consumption demand, even though the global financial crisis of 2008/09 and Eurozone debt crisis of 2011-12, during which Kosovo saw a slump in exports and investment (Figure 11.8). This performance was largely due to resilient remittance inflows from Kosovo’s large diaspora in Germany and Switzerland, strong wage and pension growth and the economy’s relative insulation from other critical channels of impact due to its weak trade and financial linkages with the European Union (World Bank, 2020[6]).

Robust growth performance has not been accompanied by an increase in employment (Figure 11.8), nor has it supported the expansion and upgrading of Kosovo’s narrow productive base. In fact, Kosovo’s remittance-fuelled, consumption-driven economy has contributed to increased reservation wages, which, alongside weak productivity growth, have undermined the economy’s competitiveness and discouraged productivity-enhancing investments and much-needed job creation in the private sector. With most of Kosovo’s youth either unemployed, inactive or seeking better opportunities abroad, Kosovo has been unable to take advantage of its potential demographic dividend.

Consumption accounts for the largest share of GDP and has been the main growth driver over the past decade. Between 2008 and 2018, private consumption increased by a cumulative 70% and currently accounts for 86% of GDP. It has been supported by: 1) robust remittance inflows, which contributed 16% to 20% of GDP annually over the period; 2) strong credit growth, which more than doubled over the last decade; and 3) increasing wages, especially those in the public sector, which nearly tripled over the period (Kosovo Agency of Statistics, 2020[5]; World Bank, 2020[6]).

Investment contributed strongly to GDP growth, increasing by over 50% cumulatively between 2008 and 2018. Most of this growth came from private investment (which accounted for about 70% of total investment), particularly domestic private investment, whose growth more than compensated for the decline in FDI, which has nearly halved from the 2008 peak of 9.5% of GDP (World Bank, 2020[6]).

Real exports have declined over the past decade, largely on account of declining global demand and the loss of base metals market share, Kosovo’s main export. Total exports nearly halved between 2011 and 2015 and have still not recovered to pre-2011 levels (Figure 11.8). They represent 23% of GDP, considerably lower than observed in most regional and global peers.

Import growth remained strong throughout the past decade and outpaced the growth of exports, as evidenced by net exports’ mostly negative contribution to GDP (Figure 11.9). Imports accounted for 56.3% of GDP in 2019 and have been strongly driven by consumption demand due to Kosovo’s very limited domestic production base (IMF, 2020[47]). High import dependence and weak export performance have resulted in large trade and current account deficits (30% and 7.6% of GDP in 2018, respectively) – higher than in most regional and global peers (Figure 11.9).

Over the past decade, domestic investment has largely supported the growth of services (Figure 11.10). In line with the economy’s high consumption and import dependence, the transport, storage, and trade sectors have grown considerably, increasing their share in GDP and, in most cases, employment. The healthcare and information and communications technology (ICT) sectors have also seen significant growth in terms of value added and employment in the past decade. The construction sector’s contribution to GDP has grown marginally, but its employment share has jumped, from less than 1% in 2008 to nearly 12% in 2019 (Kosovo Agency of Statistics, 2020[5]).

FDI, mostly diaspora-funded, accounts for 4% of GDP and has largely financed real estate and construction activities. Between 2008 and 2018 nearly 60% of FDI went to real estate and construction, and 18% went to the financial sector (Figure 11.11). In 2019, 87% of FDI went to real estate (Kosovo Agency of Statistics, 2020[5]). Housing has also been the dominant investment sector for remittance income, accounting for roughly 20% of remittance spending (Kosovo Agency of Statistics, 2013[50]).

Limited investment in production-oriented activities has translated into stagnation or decline in their contribution to GDP and employment. The manufacturing share in GDP (11%) and employment (10%) have not risen since 2008. Agriculture’s contribution to GDP has halved since 2008 (to 7%) and accounts for just 3.5% of formal employment (Kosovo Agency of Statistics, 2020[5]).

Limited investment in the tradable sector has resulted in weak export growth and limited diversification and upgrading of Kosovo’s narrow export base. Exports accounted for just 23% of GDP in 2018, less than half the contributions of regional best performers (Figure 11.9 – Panel A). Kosovo’s exports continue to be dominated by base metals, particularly ferro-nickel, which accounted for nearly 50% of total exports. Other exports include mostly low value added products, such as plastics and rubber (13%), processed foods (10%), vegetables (6%) and textiles (3%) (Kosovo Agency of Statistics, 2020[5]).

Kosovo’s strong GDP and investment growth over the past decade have not been accompanied by strong job creation. Kosovo’s labour market is still characterised by very high unemployment (25.7%) – especially among the young (55%) – feeble employment growth (1.6% over the past ten years) and widespread informality (estimated at 35%). Kosovo also has the lowest labour force participation rate in the world (38.8% in 2019) (World Bank, 2020[6]). Given the young and expanding workforce, emigration has been a release valve from labour market pressures (see the People section in this chapter).

Productivity growth has been very modest and has even declined in recent years. It has largely been driven by within-sector growth, with limited contribution from labour reallocation to more productive sectors (Figure 11.12). The negative cross-term effect indicates that within-industry and shift effects have been acting as substitutes; that is, productivity growth has been positive in contracting sectors and negative in expanding sectors. The largest share of the workforce is still employed in low-productivity sectors (Figure 11.13).

The challenge of job creation in the private sector has been amplified by wage pressures stemming from higher reservation wages.5 These in turn reflect a strong rise in public-sector wages, which nearly tripled between 2008 and 2018 (Kosovo Agency of Statistics, 2020[5]), and high remittance income, which has reached an estimated 25% of Kosovo households and has contributed to over one-third of their total monthly expenditures (Kosovo Agency of Statistics, 2013[50]; Rudi, 2014[51]).

Higher wages have also contributed to weakening labour cost competitiveness, as they have not reflected productivity growth (Figure 11.14). As a result, even though in nominal terms Kosovo’s average wage is lower than that of other Western Balkan economies, it has the highest labour costs per unit of output in the region (Figure 11.15).

In light of Kosovo’s unilateral adoption of the euro and the resulting inability to access monetary policy instruments, regaining labour cost competitiveness without painful adjustments in wages would require faster growth in productivity compared to wages. This will be more challenging if the reservation wage continues to increase, elevating the importance and urgency of addressing obstacles to productivity-enhancing investment and reigning in public-sector wage growth.

Kosovo’s current economic model is overly dependent on consumption and remittances, supporting poverty alleviation but making transformation challenging. The current model has provided for continued economic growth, and remittances have played an important welfare function by increasing the living standards of many families and alleviating poverty. At the same time, emigration provides a release valve for a labour force with limited domestic job prospects. However, like in other economies with similar characteristics, high remittance inflows in Kosovo have also pushed up relative prices in the non-tradeable sectors, including wages and property prices, which in turn increases the costs of domestic productive activities that are in competition with imports and global markets (Gammage, 2006[52]; Acosta, Lartey and Mandelman, 2009[53]; Basnet, Donou-Adonsou and Upadhyaya, 2019[54]). While this has likely supported the development of financial-sector activities and other non-tradeable services to the domestic economy, it has stood on the way of transforming the economy towards broad-based inclusiveness and job creation.

At the same time, the long-term outlook for remittances is declining. Kosovo’s demographics are declining as fertility rates decrease. Experiences in other economies point to a likely gradual decline in remittances as emigrants become more integrated into host countries (see the Partnerships and financing section in this chapter) and ties with Kosovo loosen, especially among second-generation Kosovars abroad.

Kosovo’s objective must be to maintain the benefits of the current model while building a more dynamic and productive economy focused on capabilities to make up for high costs. Strengthening linkages with the diaspora will become increasingly important, particularly as family linkages tend to weaken. Initiatives can serve to channel remittances towards economically and socially beneficial investments, as practiced in El Salvador, for example (Gammage, 2006[52]). Yet, the bulk of the economic strategy must focus on strengthening Kosovo’s potential, first and foremost by creating targeted capabilities and competences among firms and the workforce but also by a concerted drive for better business conditions. As Kosovo does not have its own currency, it must make up for the disequilibrium between tradeable-sector and non-tradeable-sector wages through increased capability and productivity in the latter. This will require a focus on strategy, education and training and an acceleration of reforms.

With a capability strategy, Kosovo can unlock potential in several export areas. Analyses of Kosovo’s current goods exports basket and other endowments indicate considerable long-term export potential for the automotive industry (vehicle and engine parts), various other machinery and metal products. Significant short-term gains can be achieved through increased exports of car seats, chemical products (e.g. cleaning products), metals and metal-based products (e.g. aluminium bars), wood-based products (e.g. toilet paper) and agro-processing products (e.g. cheese, animal food) (OECD, 2019[55]). Services exports have grown strongly over the past few years, and revealed comparative advantage data points to strong potential in ICT, finance and insurance, transport and travel services (World Bank, 2017[56]).

Unreliable electricity supply is a considerable obstacle to doing business in Kosovo and a significant deterrent to investment, especially for the manufacturing sector. In the 2019 Business Environment and Enterprise Performance Survey (BEEPS), 63% of firms identified electricity as a major constraint to their businesses – nearly three times as many as in Europe and Central Asia (ECA). The proportion was even higher among manufacturing firms: 78%, compared to 28% in ECA.

Some 60% of firms noted that they had experienced electrical outages over the past year, twice the average share in ECA, and the average cost of outages (in percentage of annual sales) was about 3.5 times higher in Kosovo compared to ECA. These problems were more pronounced for manufacturing firms, which recorded losses of about 4%, of total annual sales compared to a 1.3% ECA average (World Bank/EBRD/EIB, 2019[57]).

Challenges in the electricity sector reflect a coalescence of factors, including insufficient and unreliable supply from old and outdated coal power plants, inefficient energy consumption, limited scope for importing electricity and underdeveloped alternative sources of domestic electricity generation or energy supply (e.g. natural gas) (World Bank, 2018[58]).

If the government decides not to continue to pursue building a new lignite power plant, as indicated during interviews conducted for this report, and if one of the two existing lignite plants, which currently supplies one-third of Kosovo’s electricity, is decommissioned as planned, supply will become even more constrained. In the absence of significant new power generation capacity and better integration in regional power markets, this constraint will likely intensify.

Power generation capacity will likely need to come from alternative (mostly renewable) sources, given the limited scope for financing from international financial institutions for lignite power plant projects. A recent study noted that Kosovo’s significant potential in wind and solar power and its improved connectivity with hydropower-rich Albania could provide for a feasible energy transition path away from dependence on highly polluting lignite thermal power (Buck et al., 2018[59]).

In the context of further, especially near-term constraints on supply, improving the efficiency of electricity consumption will also be critical, particularly in light of the high intensity of consumption supported by low electricity tariffs. More cost-reflective pricing will improve funding for rehabilitation or new investments in the power sector and is an important consideration for fiscal sustainability (see the Partnerships and financing section in this chapter). As outlined in the ERP, the government is engaged in efforts to promote energy efficiency, but activities are largely focused on public-sector infrastructure, with limited incentives for efficiency improvements in the residential and private sectors. While Kosovo has made some progress in phasing out cross subsidies among categories of customers, the retail market is only partly deregulated (European Commission, 2020[60]).

Balancing this benefit against the government’s objective of maintaining affordable electricity for households will require careful consideration. Targeted support for the most vulnerable families could be among the most cost-effective and sustainable solutions to Kosovo’s energy problem (IMF, 2018[61]).

Improving governance and resolving outstanding obstacles in the business environment is essential for boosting productivity, investment and job creation, as well as reducing informality. Kosovo has made significant improvements in this area, especially in facilitating the process of starting a business (Kosovo ranks 12th out of 192 economies on this indicator in the Doing Business ranking) (World Bank, 2020[62]). However, operating and growing a business in Kosovo appears to be challenging on a number of fronts.

Widespread corruption undermines trust in institutions and increases the risk premium for investment in Kosovo. In the latest BEEPS, 56% of firms identified corruption as a major obstacle, compared to the 20% ECA and 33% global averages (World Bank/EBRD/EIB, 2019[57]). Analyses of corruption in Kosovo point to a considerable lack of transparency and accountability in the public administration, which leaves room for corruption and lack of prosecution and sanctioning of corruption. The judiciary, customs, public utilities and procurement are identified as the sectors with the highest incidence of corruption (GAN Business Anti-Corruption Portal, 2020[63]).

The inefficient and corrupt court system contributes to unpredictable, lengthy and costly contract enforcement, which is an important constraint for Kosovar businesses and an important deterrent for investment in Kosovo. Some 43% of respondents in the BEEPS identified the court system as a major obstacle – three times higher than in ECA.

Despite some progress in this area, businesses operating in Kosovo deal with an excessive and costly administrative burden. Firms surveyed in the latest BEEPS related that senior management spends, on average, 10% of the time dealing with requirements related to government regulations, which is considerably higher than regional best performers Montenegro (1.5%) and North Macedonia (2.5%). The areas of tax administration and obtaining licenses and permits were noted as particularly burdensome (World Bank/EBRD/EIB, 2019[57]).

Kosovo does not stand out in the Doing Business ranking as having a particularly problematic tax administration system in terms of time, cost and number of procedures to file taxes. In fact, Kosovo scores better on most of these indicators than the ECA and OECD on average, although it lags behind global top performers. However, the BEEPS points to a significantly higher burden in terms of the requirement to meet with tax officials (83% of businesses) and the number of times such meetings occur (about three times). This also gives scope for corrupt behaviour, which might help explain the much higher share of Kosovar businesses that identified tax administration as a major constraint (39% in Kosovo vs. 20% in ECA) (World Bank/EBRD/EIB, 2019[57]).

Some 44% of surveyed firms identified obtaining licenses and permits as a major obstacle, which is comparably higher than the ECA and global averages of around 33% (World Bank/EBRD/EIB, 2019[57]). Construction permits appear to be most problematic, requiring 18 procedures, involving at least 7 institutions or companies, taking 237 days (compared to 170 in ECA on average) and costing roughly 25% more than the ECA average (World Bank, 2020[62]). This problem may reflect weak capacities at the local administration level, where the longest delays take place. Likewise, the high costs may relate to the broader challenge of insufficient funding at the municipal government level.

The Partnerships and financing pillar of the 2030 Agenda for Sustainable Development cuts across all goals focused on the mobilisation of resources needed to implement the agenda. It is underpinned by the Addis Ababa Action Agenda, which provides a global framework to align all financing flows and policies with economic, social and environmental priorities.

Kosovo faces a few critical financing challenges. On the private-sector side, the consumption-driven economy has strongly relied on external financing from the diaspora, but these inflows have been declining and cannot be sustained over the long term in light of demographic trends. Even though credit growth has been strong and access to finance has expanded over the past decade, enterprises, especially SMEs, face considerable obstacles to obtaining credit. On the public-sector side, revenue performance needs to be improved considerably, especially with respect to the collection of personal and corporate income tax revenues, and expenditures need to be directed more towards productivity-enhancing investments and away from growing current expenditures on wages and transfers.

Over the past decade, Kosovo’s largely demand-driven economy has relied strongly on external financing from its diaspora and relatively high foreign aid inflows. In the period following the declaration of independence, remittances amounted to 18% of GDP on an annual basis, diaspora-financed FDI reached a high of nearly 10% of GDP and overseas development assistance accounted for nearly 14% of GDP and 30% of investment. This income was considerably higher than in other regional and global economies (Figure 11.16).

The remittance and ODA contribution to GDP has declined considerably over the past ten years, and the long-term prospects are weak, especially in light of demographic trends. Due to declining fertility rates (World Bank, 2020[6]), Kosovo’s population growth has slowed down notably over the past decades, and the population size is projected to fall below the current 1.8 million people by 2040 (Kosovo Agency of Statistics, 2020[5]), effectively reducing the pool of potential emigrants. Likewise, as current and future emigrants become more integrated into host countries, their relatively weaker connection to their home country further reduces the long-term prospect of diaspora financing for the Kosovo economy (Havolli, 2009[64]).

Although domestic savings (21% of GDP) are relatively high compared to most peers (World Bank, 2020[6]), domestic private investment is modest, and attracting investment in production- and export-oriented activities has been challenging. As elaborated in the Prosperity section in this chapter, considerable institutional and administrative barriers, infrastructure deficiencies and weaker labour cost competitiveness compared to regional peers have hampered domestic private investment and deterred attraction of non-diaspora-financed foreign capital, especially in the tradable sector.

Public debt has increased considerably since 2010. The fiscal balance has been consistently negative and, in most years, has surpassed the fiscal rule deficit limit of 2% of GDP (Figure 11.17). The deficits have largely reflected higher current spending, which has exceeded revenue performance. Even though, at around 18% of GDP, public debt is low compared to regional peers, the rapid increase over the past seven years (from 5.9% in 2010) has contributed to higher financing risks and more limited fiscal space to address urgent economic needs, like the ongoing COVID-19 crisis (IMF, 2020[65]).

Rollover risks have increased due to the prevalence of short-term debt and the low diversification of financing sources. Due to its unresolved status, Kosovo does not have a sovereign rating, which effectively limits the government’s access to financing from international financial markets. As a result, most of deficit is financed locally through borrowing from banks operating in Kosovo (those with EU parent banks have a 100% risk weighting on Kosovo government bonds), the Central Bank of Kosovo and the pension fund (IMF, 2018[61]). However, scope for additional borrowing from these entities is relatively limited: bank exposures to domestic government debt are assessed to be at their limit, and the Kosovo pension fund has surpassed the exposure limit of 30% of total government securities holdings (IMF, 2020[67]), which will likely worsen as a consequence of the ongoing COVID-19 crisis. The scope for diversification of public-sector financing sources (e.g. more domestic institutional investors, individuals, enterprises) remains high.

International financing has mainly come from the International Monetary Fund (IMF) and other donors. Kosovo is also eligible for overseas development assistance (ODA) financing on blend terms, which can help mitigate the limitations stemming from the lack of access to international markets for the time being (IMF, 2020[67]).

Taxes account for 93% of government revenue. Weaknesses in tax revenue performance therefore have strong implications for the government’s capacity to provide quality public services and to invest in education, health, infrastructure and other areas that are key for Kosovo’s sustainable economic development (IMF, 2020[65]).

Tax revenues increased somewhat over the past decade (from 21% to 23% of GDP) but are considerably less than in most regional and global peers (Figure 11.18). Kosovo relies significantly more on indirect taxes (value added tax [VAT] and excise taxes) and less on personal and corporate income tax revenues and social security contributions compared to most peers, which makes its tax revenues more susceptible to consumption and import fluctuations. This reflects, to a large degree, the economic structure: a consumption-driven economy highly reliant on imports with weak domestic productive capacities (see the Prosperity section in this chapter). In fact, border VAT is currently by far the largest contributor to tax revenues in Kosovo currently (IMF, 2020[65]).

Kosovo’s lagging revenue performance with respect to peers and more advanced economies reflects low tax rates (Figure 11.19), tax exemptions (especially regarding corporate income tax), a low tax base due to the large informal economy, and significant tax evasion resulting from the tax authority’s weak enforcement capacities. Tax gaps due to these factors are estimated to be high across all tax types. Personal and corporate income tax gaps are estimated at about 75% and 17% of potential revenues, respectively, while the VAT tax gap is estimated at 34% of the potential revenue (World Bank, 2014[68]).

Formalisation is a key strategic government priority. A new strategy to tackle informality, adopted in May 2019, sets clear targets for reducing the size of the informal economy and informal employment and confiscating assets in key sectors of criminal activity. It envisages progress in the development of the business registry, reduction of cash-based payments, improved co-operation between the tax authority and law enforcement, and more effective labour inspections. However, these efforts need to be complemented by measures to improve the business environment and incentives for formal employment (European Commission, 2020[60]).

Over the past decade, the share of current spending in total government expenditures increased from 65% to 73%, largely due to increased spending on wages and social security benefits for war veterans (Figure 11.20). The higher wage bill reflects an increase in public-sector employment, which rose from 7% in 2008 to 9% in 2018, and an increase in wages (see the Prosperity section in this chapter). Public-sector wages nearly tripled over this period and are now, on average, 50% higher than private-sector wages. Social security benefits, most of which go to war veterans, have also increased significantly, from 14% of total expenditures in 2008 to 25% in 2018 (Kosovo Agency of Statistics, 2020[5]; IMF, 2020[67]).

Increases in public spending have come at the expense of capital expenditures. The share of capital expenditures in total government expenditure, while high by regional standards, has declined in recent years, from 37% in 2010 to 27% in 2018 (12% to 7% of GDP). Government capital expenditures barely increased in nominal terms over this period, while current expenditures almost doubled (Figure 11.20 – Panel B) (IMF, 2020[69]; Kosovo Agency of Statistics, 2020[5]). The increase in veterans’ benefits has crowded out spending on other social programmes aimed at the poor (e.g. SAS) (World Bank, 2019[41]).

These trends, particularly the introduction of war veteran benefits in 2014, have long-term fiscal and economic implications. Not only have very generous benefits (guaranteed pension, healthcare benefits, free public transport, etc.) been granted to a large number of beneficiaries, but benefits can be inherited by family members of war veterans. They also create significant disincentives for labour market participation, as veterans or their family members cannot receive or inherit the pension income if they are employed. This has implications for both economic development and tax revenues (Republic of Kosovo, 2014[70]).

Spending on education, health and social protection has increased over the past decade, but at 4.4% 2.5% and 6.5% of GDP, respectively, it is relatively low (see the People section in this chapter). The weak progress in outcomes suggests that the efficiency of this spending needs to be improved, particularly for education (Figure 11.21).

Kosovo’s financial sector is well developed, and strong credit growth (from 4% of GDP in 2002 to 44% in 2018) has supported the robust consumption and investment growth that has driven Kosovo’s economy over the past decade. Most of the financing (93% of total loans) comes from Kosovo’s largely foreign-owned banking system, supported by financial deepening, declining interest rates (from 11.0% in 2014 to 6.5% in 2019 (IMF, 2020[71]) and low and declining NPLs (currently 2.5% from a high of 8.5% in 2013) (Central Bank of the Republic of Kosovo, 2020[72]).

Most of the financing has gone to the private sector, but the share of lending to the government has increased significantly over the past decade, in line with the sharp increase in public debt. Lending to the government increased from 2% of total loans from the banking sector in 2010 to 22% in 2019 (Central Bank of the Republic of Kosovo, 2020[72]).

Enterprises still account for the majority of private-sector lending (66% of total private-sector loans), even though their share has declined somewhat over the past decade in favour of higher credit to households, which increased from 29% to 34% of total private-sector lending (Central Bank of the Republic of Kosovo, 2020[72]). Unsurprisingly, most of the lending to enterprises has gone to the most dynamic retail and wholesale trade sectors (32% of total loans) and other services (12% of total loans), while the manufacturing sector received 10% of total loans (IMF, 2018[61]). SMEs account for 23% of total loans (IMF, 2020[73]).

Despite the relatively strong performance of the banking sector and robust credit growth over the past decade, access to financing remains a key constraint to investment and growth. In the latest BEEPS, 47% of surveyed firms in Kosovo identified this issue as a major obstacle (compared to a 17% ECA average). The proportion was higher among SMEs, which need more bank financing and have more limited scope for internal financing of investments (World Bank/EBRD/EIB, 2019[57]).

Collateral requirements appear to be a key obstacles to obtaining credit. Firms noted that over 90% of loans require collateral (compared to 73% in ECA), and the collateral value is 269% of the total loan (compared to 178% in ECA) (World Bank/EBRD/EIB, 2019[57]). The high collateral requirements reflect outstanding problems with property rights, as considerable post-war construction was completed speedily by largely unlicensed developers without relevant documentation. As a result, many apartments have been sold and occupied without official titles (see the Peace and institutions section in this chapter). In smaller towns, collateral values are highly discounted due to difficulty reselling properties on account of the stigma associated with buying neighbouring properties (EIB, 2016[74]).

The Peace and institutions pillar of the 2030 Agenda for Sustainable Development encompasses peace, stability and accountability, as well as effective governance and the performance of the public sector more broadly.

As an economy, Kosovo is one of the most ambitious and recent institution-building projects. At the end of the war and following the declaration of independence in 2008, many expected the former Yugoslav province to implode under the multiple pressures. However, apart from the 2004 riots, internal and regional conflicts have been avoided, and Serbian-majority municipalities in North Kosovo have gradually been integrated into the formal institutional framework. The national assembly and the government function, albeit struggling with political instability and the constitution explicitly provides legal safeguards to the independence and impartiality of judges.

In spite of remarkable progress, ethnic tensions weigh on Kosovo, and trust in formal institutions remains low. Since 2018, Kosovo has registered the highest number of attacks – mostly in Mitrovica, Peć (on the border with Montenegro) and Priština – targeting minority groups and their property among Western Balkan economies (Raleigh et al., 1010[75]). Newly established formal institutions are not always able to answer the needs of Kosovars. As a result, citizen trust in the national government, although in line with the regional average, is decreasing. Only 32% trust courts.

Informal institutions are stronger in Kosovo than elsewhere in the Western Balkans. Close-knit communities, often based on kinship and with strong expectations of solidarity among members, often work as a parallel social safety net (Efendic and Ledeneva, 2020[76]).6 Their secular or religious leaders are often called on to mediate disputes for which formal institutions do not have capacity. Looking ahead, informal institutions can complement formal ones, benefiting citizens and the efficiency of the public administration. For example, they can improve the working of the judiciary and the regulation of property rights. Doing so depends on Kosovo's ability to regulate and integrate informal mechanisms into formal ones and on the capacity of formal institutions to implement policies efficiently and transparently – premises not entirely satisfied today.

Capacity gaps hinder the functioning of formal institutions and make informal practices more appealing. Human and financial capacity is sometimes insufficient for the appropriate implementation of laws. For example, the judiciary lacks trained members of the court. Co-ordination among administrative units is also problematic: multiple accountability lines may undermine the effectiveness of the cadastre, for instance. Hasty and approximate drafting of laws may create ambiguities and leave room for contradictory by-laws issued by the executive, contradictory interpretations by the courts and incomplete implementation by agencies. Administrative and legislative hiccups trickle down to citizens, who may rely on the more efficient and familiar informal institutions to get things done.

The prospect of access to the European Union can play an ambivalent role in the relationship between formal and informal institutions. To signal their commitment to the European Union, voters and the international community, past governments have introduced stricter laws than originally requested and which outpaced capacity. This contributed to the adoption of laws that could not be implemented due to lack of administrative capacity to monitor compliance or citizen capacity to comply. These laws thus became “empty shells” to circumvent, often via informal practices (Lavrič, Senjković and Klanjšek, 2019[77]).

Informal networks can be a burden. They can facilitate access to services or jobs, but in exchange for favours, money or gifts, weighing significantly on household or enterprise budgets. According to the World Enterprise Survey, 56% of firms identify corruption as a major constraint, far higher than the regional average (28%). Political parties have used informal networks to gain electoral support in exchange for transfers of resources or jobs in the public sector. Political patronage has inflated the state apparatus, further hampering implementation capacity at the local and central levels and undermining the competitiveness of POEs.

Addressing informal institutions and their integration into formal ones is a key priority that could unblock Kosovo’s development along six dimensions (Table 11.5).

The public administration in Kosovo has become overly complex. The number of ministries, for example, increased from 12 in 2002 to 22 (and 70 deputy ministers) in 2017, often to iron out political tensions that could have threatened the stability of the executive. Similarly, agencies have been established on a case-by-case basis, leading to their rapid proliferation: today, Kosovo has 80 agencies employing around 27 000 employees or one-third of total public employees. Principles guiding agency establishment, organisation and oversight seem to be missing (OECD/SIGMA, 2019[78]).

The inflation of the public administration has resulted in a fragmented organisation of the central government, loss of accountability and reduced effectiveness in executing public policy. Some bodies face duplication or confused reporting lines (OECD/SIGMA, 2017[79]), which favours inaction and creates obstacles to the smooth flow of information among administrative bodies. According to Article 142 of the constitution, many agencies report to the national assembly, which undermines both the separation of powers and adequate control over their performance of these bodies (Government of Kosovo, 2016[80]).

In the past years, there have been remarkable efforts to enhance the effectiveness of the public administration, but reforms need stronger commitment. The government that took office in June 2020 reduced the number of ministers to 16, which could help streamline the decision-making process and improve co-ordination among departments within so-called “super ministries”. An extensive review of the structure and organisation of agencies was initiated in 2018 (Government of Kosovo, 2018[81]), but has halted. A progress assessment is therefore not available. Reforms of the decentralisation framework may be needed to halt the inflation of the public administration at the subnational level, as discussed in the next section.

There has been some progress in the reform of the public administration, but implementation remains weak. A new Law on Salaries introduces a more transparent salary system for public officials; however, an unfavourable ruling by the constitutional court and recent government changes have slowed its implementation. More political commitment is needed to adopt all necessary secondary legislation and ensure implementation. Procedures for recruitment to senior management positions in the civil service have improved. However, some senior civil servants might still be appointed or dismissed based on politics rather than skills (OECD/SIGMA, 2017[79]; European Commission, 2020[82]).

Municipalities are the only level of subnational government in Kosovo. There are 38 municipalities, and their borders largely reflect the distribution of ethnic groups. The 14 municipalities – 4 in northern Kosovo and the rest in enclaves – host 60% of Kosovo’s Serb population. Mayors hold executive power for a four-year term and are directly accountable to voters. Municipal assemblies are the legislative bodies. Municipalities are further subdivided into villages and urban areas, which have no formal power but can still influence the decision-making process.

Kosovo is transitioning to a highly decentralised system of government. Since 2008, an increasing number of responsibilities have been transferred from the central to the local level. Today, municipalities manage the education system (from pre-primary to secondary education), primary health care and land, water and wastewater. They also manage cadastral records, business licensing and forestry protection on behalf of the central government. Serb-majority municipalities have enhanced competences in the areas of health, education and cultural affairs.7 In 2016, the government adopted a strategy and action plan for local self-government for 2016-26 to enhance effective decentralisation (OECD/UCLG, 2019[83]).

Certain Serb-majority municipalities in the north of Kosovo remain at the centre of a controversy with Serbia. In 2008, these municipalities refused to acknowledge the unilateral declaration of independence of Kosovo and established their own administrative structures (in particular, the parallel police force and courts) under the aegis of Serbia. The 2013 EU-brokered Brussels Agreement, a first step towards the normalisation of the relationship between Kosovo and Serbia, envisaged the dismantling of these parallel administrations and the integration of their staff into Kosovo’s formal institutions. In return, Serb majority municipalities would have obtained greater autonomy and the right of self-organising into an “Association/Community of Serb Majority Municipalities in Kosovo”. The association would have co-ordinated the economic development, urban and rural planning and provision of education, health and social care services in Serb-majority municipalities. The actual powers of the association, however, were left vague and became a source of unsolved controversy. As a result, negotiations ended in a stalemate, the association still formally does not exist and parallel structures remain in place in the north of Kosovo.

Subnational public expenditure is high (24% of total public expenditure), but 61% of it is spent on compensating public employees. This is unique among Western Balkan and selected benchmark economies (Figure 11.22) and is partly a legacy of the recent past. When teachers, students and medical personnel were expelled from the education and health systems of the former Yugoslavia in the 1990s, a parallel system of schools and clinics emerged (Pula, 2004[84]).8 These merged with Kosovo’s education and health systems in the 2000s. As a consequence, Kosovo now has the lowest pupil/teacher ratio in the region – exceptionally lower than the ratios of many OECD members that attain far higher education outcomes (see the People section in this chapter).

Local own resources are not enough to cover the large expenses. Tax revenues and tariffs and user fees represent 19.8% and 5.5% of total subnational revenues, respectively.9 Municipalities mostly rely on intergovernmental transfers, which constitute 75% of subnational income – by far the largest share in the region (Figure 11.23). Half these grants are distributed based on municipal population, size and ethnic composition. Allocation of the Education Grant, for example, is based on a formula that considers teacher, administrator and support staff wages, goods and services, building maintenance and specific education policies (OECD/UCLG, 2019[83]).

Under these conditions, the decentralisation framework in Kosovo is weak and creates the wrong incentives. On the one hand, local governments do not seem to have enough resources (own or unconditionally distributed from the central level) to finance bottom-up projects and grassroots initiatives. On the other hand, mayors can pander to kin members and voters by offering positions in the local education and health system while passing the fiscal buck to the central level (Kosovo Local Government Institute, 2014[85]; USAID, 2017[86]).

Reform of intergovernmental transfers could enhance decentralisation in Kosovo. The weight of general grants could be increased and made dependent on demographic and tax-raising capacities and services needs. The distribution of block grants (targeting local education and health systems, for example) could be more results based and conditional on the achievement of socio-economic targets or on competitiveness scores (e.g. in the Municipal Competitiveness Index, supported by the Millennium Foundation Kosovo). Data used to measure results should be accessible to encourage public scrutiny.

Measures have been taken to limit patronage and its consequences to the size of the local public sector. Concerning education specifically, the hiring of teachers has been decentralised to school boards rather than municipal education directorates in an attempt to de-politicise the process (USAID, 2017[86]). Yet, interviews conducted as part of this MDR revealed that the governance and political affiliation of school boards can bias the selection of candidates. More generally, an annual ceiling of 0.5% on current local expenditure growth was introduced in 2009, and according to the Law on Public Finance Management and Accountability, municipalities have to publish annual financial reports. However, most lack internal auditors and auditing mechanisms, thus broadly obscuring the actual use of local budgets (OECD/SIGMA, 2019[78]).

The internal structure of political parties also shapes the accountability and behaviour of local politicians. Political parties in Kosovo are very hierarchical: leaders at the top set the party strategy and manage the internal flow of resources, especially for national and local electoral campaigns. There is neither middle management nor spaces for party members and municipal leaders to challenge party leadership. Lack of internal accountability weakens external accountability. Locally elected representatives end up owing their careers to the respective party leaders rather than to voters. To reciprocate, mayors (but also members of the national assembly) necessarily prioritise managing the interests and patronage requests of party leaders and possibly of their networks over the provision of public services to the rest of the populationNo source specified..10 The lack of internal accountability may also create space for the infiltration into leadership of informal networks and their particular interests, which can affect the control of the decision-making process.

Formally, Kosovo has an exemplary justice system. The constitution and the legal framework provide legal safeguards for the independence and impartiality of judges. Cases are supposed to be allocated randomly throughout the courts, and judges cannot be transferred without their consent. The recruitment process of judges and prosecutors is based on entry examinations and seems transparent. The Kosovo Judicial Council and the Kosovo Prosecutorial Council (the highest self-governing bodies of the judiciary) carry out performance evaluations of judges and prosecutors every three years (European Commission, 2019[7]). This might have helped restore, at least partly, citizen satisfaction with the judiciary (UNDP, 2019[87]). However, the quality of performance evaluations remains an issue, and the positive ratings of virtually all judges and prosecutors in 2019 were at odds with citizen perceptions of their professionalism (European Commission, 2020[82]).

The judicial system is considered biased and inefficient. Informal networks and relationships may steer the activity of judges and prosecutors, in spite of council oversight. The economic resources allocated to the functioning of the judiciary amount to 2.4% of the general budget and are deemed insufficient. Political will to increase them seems to be lacking (Tika, 2017[88]). Both criminal and civil justice are subject to significant delays compared to OECD countries (Figure 11.24). Courts face a high number of criminal cases, most of which are for minor offenses (European Commission, 2019[7]): In 2016, there were 440 627 pending cases, and the basic court in Pristina struggles with a large backlog of administrative cases, as well as many minor offence cases (European Commission, 2020[82]). Bribing and gift giving are sometimes used to speed up procedures (and influence their outcomes), further inflating the overall cost of justice and discouraging its use, especially among the poor.

A mediation system has been operational since 2008, and a Chamber of Mediators was established in September 2018. However, citizens are unfamiliar with these mechanisms and seem to prefer informal mediation outside the courts. These combine modern and traditional techniques and involve independent third parties, such as village elders or Imams (Pasamitros, 2017[90]). The inclusion and regulation of these measures in the formal court system could speed up the settlement of quarrels before they are brought in front of judges, thereby reducing backlogs.

A vetting process, coupled with an empowered Academy of Justice, could improve the quality and integrity of judges and prosecutors. Decision makers have been considering the vetting of all or most members of the judiciary. The experience of Albania, which has embarked on one of the most radical vetting processes in the region, could provide insights into the dos and don’ts of the process. For example, Kosovo must ensure that the Academy of Justice has the required capacity to train sufficient new judges to fill the voids the vetting process will produce. Vetting aside, the academy is an asset, and its role has been increasingly valued.11 It provides initial and in-service training for judges and prosecutors and their legal and administrative staff (courses focuses, for example, on public procurement and combating corruption, money laundering and cybercrime) and maintains an online library of applicable legislation, commentaries and other legal materials open to all members of the judiciary (European Commission, 2020[82]).

POEs play a significant role in the economy, but their performance has been disappointing. Kosovo has 17 POEs managed at the central level and in the energy, waste and water management, telecommunications and transport sectors.12 POEs account for 17% of GDP and employ around 10 000 people (3% of total employment). The average monthly salary in POEs has been the highest among institutions in Kosovo: in 2018, it amounted to EUR 620 after taxes, compared to EUR 573 in the rest of the public sector and EUR 401 in the private sector. Yet, POE performance has long been disappointing: 10 out of 16 POEs run losses, and overall POE debt amounts to approximately 8% of GDP. Figures are particularly problematic in the telecommunication sector. Telekomi i Kosovës, the second largest employer among national POEs, was the largest loss-maker in 2016 (EUR 31 million loss). Its liabilities alone accounted for 5% of GDP (Table 11.6).13 Significant underinvestment in capital (0.2% of GDP in 2017) raises concerns about POEs’ medium-term viability (IMF, 2018[61]).

To alleviate the burden of POEs on the national budget and development outlook, governments have conducted mass privatisation since 2002. Kosovo Electricity Distribution and Supply was privatised as part of the comprehensive energy strategy for 2009-18. Several concession contracts have also been signed off. In 2019, the government requested European Bank for Reconstruction and Development assistance for the restructuring and repositioning of Kosovo Telecom to improve its performance and practices. This could lead to the privatisation of the company. In the same year, the Trepça mining complex, which has Europe’s largest lead-zinc and silver ore mine, was officially transformed into a joint stock company. The government kept control of 80% of the shares employees own the remaining 20% (EBRD, 2019[91]). Kosovo has also put in place a series of laws to reform the corporate governance of POEs.

A number of laws issued between 2008 and 2015 have been improving the transparency of the management of POEs and have adopted the OECD corporate governance principles (OECD, 2015[92]). The Law on Publicly Owned Enterprise (Law No. 03/L-087, issued in 2008) and its complements (Law No. 04/L-111, issued in 2012, and Law No. 05/L-009, issued in 2015) define the government’s role in POE ownership and oversight and the duties of their boards. A government decision signed in 2008, moreover, defines the rationale for public ownership: 1) to support economic and strategic interests; 2) to ensure continued national ownership of enterprises; and 3) to supply specific public goods and services when private suppliers do not exist (OECD, 2018[93]). The government exercises shareholder rights in centrally managed POEs.

POE boards need more autonomy from the shareholder to enhance performance. The government selects POE board members from candidates shortlisted by an independent ad hoc Recommendation Commission of experts. In practice, a number of POE directors are recognised as political persons (GAP, 2015[96]). The composition of the commission itself could be a potential source of political capture, since the Office of the Prime Minister appoints its members. Board independence from political interests is necessary to weaken political patronage. Boards have a number of competences in relation to POE officials: they recruit them, determine their salaries and terminate their contracts. In a context of pervasive political patronage, boards that are too politicised could increase the number of employees to reward party loyalties and hurt the interests of the company (GAP, 2015[96]).

The financial oversight of POEs needs significant improvement. By law, the POE Monitoring Unit under the Ministry of Economy and Environment reports to the assembly on the performance of central POEs on an annual basis. According to the auditor general, however, reports are published with large delays and are sometimes incomplete (IMF, 2018[61]), making the timely identification of potential fiscal risk difficult. Debt issuance by POEs requires no government approval, nor is it monitored at the central level. To increase the quality and timeliness of reports, their information (e.g. financial plans, financial statements, requests for financial support) can become part of the budget process. The Ministry of Finance, which does not currently collaborate with the unit, should be given a clear legal mandate to analyse the data, propose limits on and approve issuance of POE debt and guarantees, and disclose related fiscal risks in annual budget documents.

A working group of representatives from various ministries recently worked on a draft Law on Publicly Owned Enterprises. Its purpose is to align the functioning of POEs with OECD standards. The new government is supposed to hold a new round of discussions and public consultations before the release of the final draft.

The legislative framework regulating land management is relatively complete and formally in line with international standards. The 2008 Constitution of Kosovo explicitly guarantees the right to own property (Art. 46). Use is regulated by eight main laws (Table 11.7). The Kosovo Cadastral Agency (KCA) and Municipal Cadastral Offices (MCOs) are responsible for the implementation of this legislative framework. MCOs run the day-to-day operations of the cadastre. The KCA is responsible for the overall co-ordination and training of staff. Two other independent agencies play a complementary role for the proper functioning of the land market. The Privatisation Agency of Kosovo supervises the privatisation of agricultural land owned by POEs. The Kosovo Property Agency (KPA) facilitates the resolution of property claims resulting from the armed conflict between the Federal Republic of Yugoslavia and Kosovo with respect to private immovable property.

Well-rooted social customs and norms function alongside formal legislation. Since the 15th century and throughout Ottoman domination, a set of unwritten laws – the Kanun of Lekë Dukagjini – has regulated land management in Kosovo. Because of its longevity, the Kanun still influences Kosovo society but often clashes with formal institutions. For example, the fact that the old Ottoman legislation recognised males as sole heirs of real property is one reasons women are rarely registered as landowners (USAID, 2019[98]). The Kanun also regulated land transactions: before being public, any sale had to be approved by relatives, neighbours and other villagers. These customs still condition the functioning of the land market in certain areas of Kosovo (and Northern Albania, as discussed in the ongoing Albania MDR).

Informality is partly the result of long-lasting ethnic tensions and the resulting conflict. Already in the 1990s, informal contracts, imposed by the then Federal Republic of Yugoslavia and Kosovo, were concluded to circumvent restrictions on transactions between Kosovo Albanians and Kosovo Serbs. Most property records and archives were either destroyed or removed by retreating Yugoslavian troops during the 1998-99 conflict. The war, moreover, resulted in around 245 000 displaced people who, upon their return, found their former properties occupied. Claims were filed, and the KPA processed virtually all of them. However, enforcement of decisions has been problematic due to illegal buildings on former claimants’ properties and public land. The KPA also struggles to regulate the settlement of displaced Kosovo Roma, Ashkali and Egyptians who lived in informal settlements before the war and thus have no formal legal title to claim properties (Todorovski, Zevenbergen and van der Molen, 2016[99]; USAID, 2016[97]).

Faster and cheaper forms of registration, together with the recognition of alternative forms of mediation, could help enhance formal registration. According to a recent survey conducted by the United States Agency for International Development, 60% of landowners have not registered their properties (USAID, 2019[98]). Most consider registration time consuming and expensive, despite recent improvements.14 Some owners regulate ownership informally, for example by orally concluding property transfers in the presence of witnesses. Others inherited land plots tacitly, without going through formal procedures. Some parties prefer to settle disputes without resorting to legislative and court proceedings. While Kosovo has put a lot of effort into making property registration accessible, it could consider the formalisation of other forms of mediation, possibly via village heads or municipal officials rather than lawyers and judges.

Redesigning the institutional relationship between the KCA and MCOs could help enhance the implementation of land laws. These bodies have complementary tasks, but the KCA is accountable to the Ministry of Environment and Spatial Planning, while MCOs are subordinate to the relevant local government. Multiple accountability lines may undermine the effectiveness of the cadastre: co-ordination problems among ministries may lead to inefficiencies, high monitoring costs or capture (Hammond and Knott, 1996[100]; Estache and Martimort, 1999[101]; Voorn, van Genugten and van Thiel, 2019[102]). MCOs may leverage potentially diverging agendas between the agency, which co-ordinates them, and the Ministry of Local Government Administration, which holds them accountable, in order to pursue their own interests or favour external actors interested in altering local property registers. Kosovo could consider an institutional reorganisation giving the agency greater financial and administrative autonomy from the Ministry of Environment and Spatial Planning, and full control of MCO activities.

Raising awareness about land rights can strengthen the legislative framework. Public knowledge about property rights issues and procedures, particularly among minorities, remains spotty, making informal options appear more accessible. Moreover, when it comes to upholding their rights in court or cadastral offices, minority groups encounter language barriers and prohibitive costs. These outcomes point to a need to educate citizens on these matters (USAID, 2019[98]).

Complete land registries may boost agricultural productivity. Kosovo has a large number of small and fragmented family farms and a small number of large-scale corporate farms. The average size of agricultural holdings in 2014 was 3.2 ha (up from 2.5 ha in 2009), with 35% of holdings having less than 0.5 ha of arable land (Hartvigsen, 2013[103]; Bedrač et al., 2019[104]). Because agricultural productivity usually increases with farm size, there have been efforts to consolidate separate parcels of land, reallocating them among landowners. However, reallocation is often difficult because it involves parcels not formally registered (USAID, 2016[97]). Enhancing registration is therefore crucial to make transactions secure and to favour consolidation.

Secured land rights could contribute to long-term sustainable growth. Owners with legal titles may have better access to loans, since financial institutions often only use properties with legal titles as collateral. Access to credit would encourage long-term investments and a more efficient and sustainable use of land resources. Property rights also facilitate law enforcement and anti-corruption efforts. For example, the confiscation of assets is only possible with an updated property registry.

The KAS has been the main producer of statistics since 1999. According to the Law on Official Statistics, adopted in 2011, the KAS co-ordinates the National Statistical System, which includes the Central Bank of Kosovo, the Ministry of Finance and other national authorities (ONAs) (Government of Kosovo, 2011[105]). The Statistical Council advises the KAS on the preparation of statistical work programmes, annual plans and the overall functioning of the agency. The council consists of 13 members, including the CEO of the KAS and representatives from public user and data provider institutions, ONAs, academia, civil society and the business community. Because it is a young institution, the KAS’ co-ordination role is evolving. For instance, administrative data exchanges with line ministries take place within specified working groups (Duerr, Hackl and Andersen, 2017[106]).

Statistical capacity has been improving since 2013. The KAS is currently implementing its second five-year plan, the Programme of Official Statistics 2018-2022 (Kosovo Agency of Statistics, 2017[107]). Broadly, the KAS’ products cover economic, social, agriculture and environmental statistics (Open Data Watch, 2018[108]). Cross-domain publications, such as the statistical yearbook and the quarterly bulletin, combine various areas of data. Economic data are collected relatively frequently; Kosovo has some of the most complete subnational budget execution data (Kosovo BOOST) in ECA. The KAS also stands out in its extensive use of administrative data, having signed more than 15 memoranda of understanding with data providers (Duerr, Hackl and Andersen, 2017[106]). Data dissemination has improved. With support from the Swedish International Development Agency, the KAS set up a new website accessible in English, Serbian and Albanian.

Despite these positive trends, the KAS needs to strengthen institutional, organisational and individual capabilities. According to the 2011 Statistics Law, the head of the KAS does not have the sole responsibility for deciding on statistical methods, standards and procedures, and his or her three-year term does not cover the five-year planning cycle. These legal caveats may affect statistical planning and quality. Although Kosovo participates in the IMF Enhanced General Data Dissemination System programme, supporting members to improve statistical quality (IMF, 2020[109]), frequent changes in methodology and instruments have severely compromised comparability over time, especially with regards to labour force and household surveys. For instance, surveys conducted from 2000 to 2008 were based on the 1989 Census, while surveys after 2012 use the 2011 Census as base year (World Bank, 2017[56]).

Overall, more financial resources are needed. According to the Creditor Reporting System, the KAS received around USD 10 million from development co-operation providers in 2010-15 (OECD, 2020[110]). Further domestic and external funding will be needed to scale up human resources and improve statistical production and quality management. As of 2020, the KAS does not dispose over enough statisticians to fulfil its programme of work, and many employees lack specialised skills. Next to external training supported by Eurostat and Sida, internal workshops on quality management and metadata provision are necessary to adhere to international standards (Duerr, Hackl and Andersen, 2017[106]). For instance, the KAS could offer access to e-learning resources to upskill staff cost effectively. In the long term, collaboration with academia and research institutes could help train the next generation of statisticians.

The Planet pillar of the 2030 Agenda for Sustainable Development reflects the need to find the right balance between socio-economic progress and capacity to sustain the planet’s resources and ecosystems and to combat climate change.

Environmental concerns are not a political priority in Kosovo. The 2016-21 NDS has no environmental pillar at this stage (Government of Kosovo, 2016[111]) and Kosovo has not adopted a strategy or long-term action plan to reduce CO2 emissions. The economy is rich in biodiversity and natural resources, and their preservation and sustainable use could pave the way for more environmentally friendly growth and enhanced well-being and quality of life.

The Planet section in this chapter identifies three major environmental constraints to sustainable development in Kosovo. First, mismanagement of natural resources could hamper Kosovo’s future development path. Second, ongoing challenges in waste management, air pollution and limited and unequally distributed water resources threaten the environmental quality of life of all Kosovars. Better implementation and enforcement of environmental legislation is essential. Third, the energy supply is unsustainable and insufficiently diverse, secure and efficient. Although environmental concerns remain secondary in Kosovo, in common with other economies in the region, the EU approximation process could help raise environmental awareness and drive environmental reforms (Table 11.8).

Kosovo is home to a rich ecosystem and rich biodiversity, but their protection remains challenging. Kosovo doubled its protected area from about 4.36% of the territory in 2002 to approximately 10.9% (126 119 ha) in 2019. This is slightly higher than the regional average (8.88%) but below the OECD and EU averages (15.1% and 25.94%, respectively) (Figure 11.25). Most of the protected area falls within the two main national parks (10.6%), Bjeshkët e Nemuna (62 000 ha) and Sharri (39 000 ha) and Bjeshkët e Nemuna (62 000 ha) (AMMK, 2018[112]). Kosovo is also very rich in flora, a large percentage being endemic (AMMK, 2019[113]; AMMK, 2018[112]). However, illegal construction, infrastructure development, logging, hunting and fires are frequent in protected area. The lack of spatial and regulatory plans and irregular monitoring of biodiversity make the efficient management of Kosovo’s protected area an issue.

Forests cover a large part of the territory, but little is done to fight their degradation. Kosovo has considerable forest coverage (around 44.7% of total land area in 2018, or 481 000 ha), as do other Western Balkan economies (41.27%), which is greater than the EU and OECD averages (38.09% and 31.37%, respectively) (Figure 11.26). Approximately 62% of forests (295 200 ha) are public, and 38% (180 800 ha) are privately owned (Ministry of Agriculture, Forestry and Rural Development of the Republic of Kosovo, 2019[114]). This is an estimation, as there are no official statistics on the size or value of forests due to lack of regular monitoring by public authorities. Based on the latest Forest Inventory, realised in 2012, 59% of public and 34% of private forests have been subject to illegal felling and uncontrolled harvesting activities (Ministry of Agriculture, Forestry and Rural Development of the Republic of Kosovo, 2013[115]). Most illegally harvested timber was initially used to rebuild houses after the war; now, it is used for firewood during winter, which affects air pollution (Ministry of Agriculture, Forestry and Rural Development of the Republic of Kosovo, 2009[116]). Forest fires are another major challenge. The number and affected area increase each year. In 2018, the Forest Agency of Kosovo identified 83 fires in public and private forests, affecting about 949 ha (Ministry of Agriculture, Forestry and Rural Development of the Republic of Kosovo, 2019[114]). Forestry legislation and the planning and management of forest policies, remain in the early stages. Limited implementation and insufficient enforcement of normative and regulatory frameworks constitute an additional constraint to the sustainable use of natural resources.

Kosovo is rich in natural resources and has large reserves of lignite, lead, zinc, silver, nickel, cobalt, copper, iron and bauxite, but serious gaps exist in their sustainable management. Kosovo, like the whole of former Yugoslavia, has a long history of mineral extraction and exploitation. Mining and quarrying currently accounts for 2.1% of GDP, compared to 1.2% of GDP in the Western Balkans (see the Prosperity section in this chapter). Kosovo has the world’s fifth largest lignite reserves (around 11 billion tonnes), which are distributed across the territory (mainly in the Drenica and Dukagjin basins) and primarily serve power generation in Kosovo (World Bank, 2017[56]). Nickel exploitation is concentrated in the Dushkaja, Gllavica and Suka mines. Lead, zinc and silver are present in the Trepča complex (Ministry of Economic Development of the Republic of Kosovo, 2012[117]). Most mining sites have huge environmental and social problems (e.g. water and soil pollution from heavy metals) and do not meet the standards for sustainable mine management (UNEP Vienna, 2009[118]).

Kosovars, in common with other Western Balkan populations, are exposed to the highest concentration of air pollution in Europe. Annual exposure to particulate matter (PM) 2.5 is 27.0 µg/m3, which is higher than the regional average (25.8 µg/m3), more than double the EU and OECD averages (13.1 µg/m3 and 12.5 µg/m3, respectively) (Figure 11.28) and above the maximum 10 µg/m3 recommended by the World Health Organization. Beyond PM, the principal sources of contaminants are carbon monoxide and CO2, nitrogen oxides (NO and NO2), ozone (O3) and sulphur dioxide (SO2). The World Bank estimates the annual cost of environmental degradation in Kosovo at between 2.9% and 7.5% of GDP (midpoint 5.3% of GDP) (Worldometer, 2020[119]). Pollution was considered a serious threat by almost two-thirds of Kosovars and a very serious threat by one-third in 2019, in line with the regional average (Figure 11.27) (Box 11.1). This shows encouraging public concern but has not translated into long-term government commitments.

Air pollution has a considerable impact on health and poses a serious threat to the economy. The health costs of air pollution in Kosovo were estimated at 3.6% of GDP in 2016 (around USD 240 million), 1.3 percentage points higher than in 2010 (2.3% of GDP) (World Bank, 2019[121]; World Bank, 2017[56]). PM2.5, NO2 and O3 were estimated to cause 3 920 premature deaths in 2016, the large majority attributable to PM2.5 (3 800 deaths, the equivalent of 97% of premature deaths). PM2.5 is also estimated to have caused 37 200 years of life lost (YLL) annually, which corresponds to 2 100 YLL per 10 000 inhabitants (EEA, 2019[122]).

Power generation, heating and transport are the main sources of air pollution. Poor air quality particularly affects areas in and around Drenas, Mitrovica, Obiliq and Priština (AMMK, 2018[112]). The two main power plants (Kosovo A and Kosovo B) are among the ten most toxic in Europe.15 They are considered the main sources of PM in Obiliq and Priština (Faberi, 2014[123]; HEAL, 2016[124]) and their health cost is estimated at between EUR 70 million and EUR 169 million per year (HEAL, 2016[124]). It is important to bring the gaseous emission levels of these power plants in line with the EU acquis. Works to enhance the environmental performance of Kosovo B have started (European Commission, 2020[82]). The exceedance of the daily PM limit is particularly high in winter. As public transit is poorly developed, cars are the main means of transport, and the number of cars increased by around 60.7% in the past seven years, from 170 321 in 2011 to 280 422 in 2018 (Ministry of Infrastructure and Environment of the Republic of Kosovo, 2020[125]; Kosovo Agency of Statistics, 2020[5]). The average age of cars in Kosovo is 19 years. The ecological tax is fixed at EUR 10 for all vehicles, without differentiation by age of vehicles No source specified..16 The power sector and road transport contribute 75% and 12% of total greenhouse gas (GHG) emissions from energy production, respectively (AMMK, 2015[126]).

Kosovo recently improved air quality monitoring but needs to assess the impact of air pollution on public health regularly and increase the number of monitoring stations. Through a European Union-funded project, Kosovo’s air quality monitoring system has been fully operationalised, and the monitoring of air quality has been improved. However, the coverage of air quality monitoring is limited to 12 monitoring stations: 2 in Priština, 3 in the Kosovo Energy Corporation area and the rest in Brezovica, Drenas, Gjilan, Hani i Elezit, Mitrovica, Peć and Prizren (AMMK, 2018[112]). Going forward, monitoring should include regular assessment of impacts on health towards reducing death and illness caused by air pollution (see the People section in this chapter).

Kosovo has low waste production, but solid waste management remains limited. Improvement in coverage of municipal waste collection will be essential to reducing Kosovars’ exposure to pollution. Each citizen produces, on average, 227 kg of waste per year, which is below the EU and OECD averages (492 kg and 525 kg per capita per year, respectively) and below the Western Balkan average (Figure 11.29). Waste collection and disposal are poor, especially in rural areas. Municipal waste collection regularly serves approximately 75% of the urban population but only 41% of the rural areas (AMMK, 2018[129]). Nationally, municipal waste collection covers 57.7% of the population, which is much lower than in other regional economies, except Albania (Kosovo Agency of Statistics, 2020[130]).

Kosovo’s national normative framework and strategies for solid waste management are not systematically fulfilled. Kosovo recycles slightly below 5% of waste, which is similar to other regional economies (Eurostat, 2018[131]). Nationally, the waste collection rate is 77%, but it varies across Kosovo’s regions (Figure 11.30). Less than 40% of solid waste is disposed of in managed facilities (European Commission, 2020[82]) and illegal dumping remains a serious problem in all municipalities (urban and rural). There were 2 529 illegal landfills and dumpsites in Kosovo in 2019, a large increase over 2017 (1 572) (European Commission, 2020[82]; KEPA, 2019[133]). Untreated waste is frequently burned or discarded and, consequently, not only negatively affects air and soil pollution but also degrades Kosovo’s rivers and scarce water resources. Around 15 municipalities have local waste management plans. Going forward, the complete implementation of Kosovo’s Waste Management Strategy 2013-2022 and its new Integrated Waste Management Strategy (2020-2029) and Action Plan (2020-2022) (Ministry of Economy and Environment of the Republic of Kosovo, 2020[134]) will be key, along with better co-ordination between waste management companies and central and local governments. Kosovo should also fully align its legislation with the EU acquis on solid waste management and make further efforts to reduce waste and increase recycling (European Commission, 2020[82]).

Universal access to drinking water is only provided in urban areas. Kosovo’s urban population is almost 100% covered with drinking water supply, on average, compared to 69.7% of the rural population (Inter-Ministerial Water Council of the Office of the Prime Minister, 2014[135]). In some regions, less than half the villages are connected to a functioning water system: 47.3% in Gjakova and 41.6% in Mitrovica (OSCE, 2019[11])(see the People section in this chapter). Roma are disadvantaged in terms of coverage and access to water and public sewerage, as they are in other Western Balkan economies (Robayo-Abril, 2019[136]; World Bank/UNDP/European Commission, 2017[137]) (see the People section in this chapter).

Kosovo has limited water resources compared to other Western Balkan economies, with unequal distribution from among the five main river basins. Kosovo has just 2 100 m3 of total renewable water resources per capita per year, which is around 13.95% of the regional average (Figure 11.31). It is the only economy in the region close to water stress levels (1 700 m3/capita/year), particularly affecting three river basins: Iber Basin (1 092 m3/capita/year), Lepenci Basin (1 320 m3/capita/year) and Morava e Binçës Basin (1 380 m3/capita/year) (Government of Kosovo, 2016[138])). Due to increasing economic, environmental and demographic pressures, all river basins in Kosovo are expected to be water stressed in 20 years (World Bank, 2018[139]). The share of internal water resources is around 96.4% (Eurostat, 2018[131]). Consequently, the dependency ratio is very low (FAO, 2017[140]).

The normalisation of political relations with Serbia regarding the management of water resources is crucial for Kosovo. The Ibër Lepenc canal and the Pridvorica Dam, located in the northern part of Kosovo, are relevant for the economy, as they supply water to one-third of the population. Both Kosovo A and Kosovo B power plants depend on their waters for cooling. Without an agreement with Serbia on the management of these water resources, Kosovo will remain vulnerable in the future.

Kosovo will have to prioritise competing water uses. Households and agriculture are the largest users: households consume around 52% of the abstracted water and agriculture around 41% (Government of Kosovo, 2016[138]). Around 62% of citizens live in rural areas and depend on agriculture for their livelihoods. With warmer temperatures and a projected decline in annual precipitation, water use for agriculture will remain important, and demand for irrigation will increase. Demand from industry (representing around 8%), particularly the energy sector, is also growing. The energy sector uses water for hydropower and, mainly, for cooling thermal power plants. Reconciling competing uses of limited water resources (for drinking, agriculture, energy and industry) will be key for Kosovo’s future development.

Kosovo has advanced considerably in establishing a normative and regulatory framework on water, but significant gaps exist in implementation, especially at the local level. The central government is responsible for strategies and implementation of policies in the water sector and river basin co-ordination. Regional water companies are in charge of service provision. The government has entrusted water tariff-setting responsibilities to the independent Water Services Regulatory Authority. However, complete implementation and enforcement of the current framework is lacking. Moreover, at subnational levels, water use planning remains limited, as river basin management plans have not yet been adopted. Furthermore, Kosovo has not yet aligned its water legislation with the EU acquis (European Commission, 2020[82]).

The efficiency of water service providers could be improved. The continuity of water supply services is almost guaranteed: in 2018, it averaged 22 hours per day (Water Services Regulatory Authority of the Republic of Kosovo, 2018[141]). Service reliability is an issue in some Uroševac municipalities, with a water continuity less than 18 hours per day (Water Services Regulatory Authority of the Republic of Kosovo, 2018[141]). Non-revenue water was estimated at around 58% (Water Services Regulatory Authority of the Republic of Kosovo, 2018[141]), below the Western Balkan average of 75% (World Bank, 2017[56]). Operational costs are covered by tariffs (World Bank/IAWD, 2015[142]), however, capital investments in the water sector are mainly financed by the international donor community.17 Collection rates were 87% for households and 95% for commercial and industrial consumers in 2018, but rates vary significantly across regions, with the lowest rates in Mitrovica (60% and 83%, respectively) (Water Services Regulatory Authority of the Republic of Kosovo, 2018[141]). Water tariff setting should better integrate sustainability and consumption criteria to discourage excessive consumption, e.g. for irrigation, for which non-volumetric pricing is widely used.18

Kosovo has no wastewater treatment, and discharges wastewater directly into rivers. Around 1.0% of the population is connected to wastewater treatment plants, less than the Western Balkan average (6.5%) and far less than the EU average (86.0%) (Eurostat, 2018[131]; World Bank, 2018[139]). Three wastewater plants are currently under development. Water pollution due to untreated sewage, waste dumping and agricultural and industrial polluters affects the health of Kosovars. Water contamination costs more than EUR 30 million per year, according to World Bank estimations, and leads to various diseases particularly dangerous to children, such as diarrhoeal disease (Worldometer, 2020[119]).

Responsibility for environmental matters was recently transferred from the Ministry of Infrastructure (formerly Ministry of Infrastructure and Environment) to the Ministry of Economy and Environment. The Ministry of Economy and Environment (formerly the Ministry of Economic Development) has the main regulatory responsibilities related to the creation and implementation of legislation in the areas of environment, water and spatial planning.

Kosovo must continue to progress in the implementation of environmental legislation in the context of approximation with the EU acquis in order to increase compliance and effectiveness at the national and subnational levels. Capacities for adequate environmental inspections remain limited due to lack of resources and co-ordination among national and local inspecting bodies. Despite some progress in strengthening the criminal code, Kosovo has not yet fully aligned legislation with the European Union’s Environmental Liability Directive (European Commission, 2020[82]).

Like other Western Balkan economies, Kosovo is characterised by high energy intensity, low energy efficiency and widespread energy poverty (see the Prosperity section in this chapter).

Kosovo relies heavily on domestic coal production, as do many other economies in the region, except Albania. Kosovo generates approximately 94.4% of its domestic electricity from coal (lignite) and around 5.0% from hydropower (Figure 11.32). At 0.146 toe/USD 1 000, energy intensity in Kosovo is substantially higher than the regional average (0.126 toe/USD 1 000) and almost double the EU average (0.087 toe/USD 1 000) (Figure 11.33). The EU integration process could be an important driver of the diversification of Kosovo’s energy sector, since shifting from coal to renewables and increasing energy efficiency are priorities set by the European Union for Kosovo’s energy sector (European Commission, 2020[82]).

Kosovo’s gas market is not developed at this stage. Kosovo has no domestic production of natural gas, and it is not linked to any operational natural gas supply networks (Energy Regulatory Office of the Republic of Kosovo, 2019[143]). However, the Kosovo Economic Reform Programme 2020-2022 aims to prepare a Gas Master Plan for the distribution and supply of natural gas (reform measure two). The Ministry of Economy and Environment is responsible for preparing the technical documentation for the plan’s elaboration. Developing the gas market would promote the decarbonisation of Kosovo’s economy by reducing dependence on coal and by improving the diversification of the energy sector.

There is no diversification of renewable energy sources in Kosovo, and investments are low compared to those dedicated to coal. Thanks to hydropower and the recent inclusion of biomass in the definition of renewable energy sources, the overall share of renewable energy in gross final consumption was 24.9% in 2018, slightly below the regional average (28.8%) but higher than the EU average (18.9%) (Eurostat, 2018[131]). However, other sources of renewable energy – solar and wind energy – are insufficiently developed, even with the recent implementation of new solar energy plants (3.4 MW) and wind energy plants (137.4 MW) (Energy Community Secretariat, 2019[144]). Renewable incentives continue to be modest compared to coal subsidies (Figure 11.35). A working group established by the Ministry of Economy and Environment is currently drafting a concept document to promote renewable energies further. Kosovo should fully align its energy regulation with the EU acquis to facilitate the integration of renewables into its energy market (European Commission, 2020[82]). To raise the share of renewables like solar and wind in Kosovo’s energy mix, it is important to integrate Kosovo’s energy market regionally by connecting its transmission network with neighbouring economies.

Access to electricity is a main concern in Kosovo. The economy ranks 90th in the world for ease of getting electricity (World Bank, 2020[62]). Due to degraded and old electricity transmission and distribution networks, secure, reliable and constant supply is a challenge. Firms frequently identify electricity supply as the second greatest business constraint, along with informal sector practices. Electricity is the top constraint among enterprises with more than 100 employees (World Bank/EBRD/EIB, 2019[57]) (see the Prosperity, and Peace and institutions sections in this chapter). In 2019, 59.9% of firms in Kosovo experienced electrical outages, more than the Western Balkan average (48.9%) (World Bank/EBRD/EIB, 2019[57]). Although electric power transmission and distribution losses decreased from 22.94% in 2005 to 15.05% in 2014, Kosovo is regularly affected by important distribution losses. According to Kosovo’s Energy Regulatory Office, in 2018, losses accounted for 14.6 % of electricity supply (of which 1.4% were transmission losses and 13.2% were distribution losses) (Energy Regulatory Office of the Republic of Kosovo, 2019[146]). Power transmission and distribution losses thus remain considerable, as they do in other Western Balkan economies (Figure 11.34). Theft remains important as well.

Kosovo needs to open and liberalise its energy market to implement the Third Energy Package fully.19 There has been some progress: the certification of Kosovo’s transmission system operator, KOSTT, is complete. The process to complete the requirements to unbundle electricity transmission systems operators is ongoing in Kosovo (Energy Community Secretariat, 2018[148]); however, the development of competition is stagnant (Energy Community Secretariat, 2019[144]). Moreover, the recent contract the government signed with ContourGlobal to build a 450 MW thermal power plant (Kosova e Re) substantially impairs the aim of an open and competitive electricity market in Kosovo, as it is at odds with European laws on competition and state aid (Energy Community Secretariat, 2019[149])(see the Prosperity, and Peace and institutions sections in this chapter).20 The development of competition in the sector could result in a better quality of service and a more secure energy supply.

Despite recent progress, energy market integration in the Western Balkan region is not achieved and seriously affects Kosovo. At the time of writing, the connection agreement between KOSTT and the European Network of Transmission System Operators for Electricity (ENTSO-E) was expected to be enforced starting in autumn 2020. Technical preparations, through ENTSO-E and the Swiss transmission system operator, Swissgrid Coordinator, are ongoing. However, Kosovo’s energy sector remains highly politicised, and due to the absence of a stabilisation of relations with Serbia, the energy supply will continue to suffer from unsolved issues between the transmission systems operators in both economies. As a result, the technical agreements between operators are signed but not fully implemented.

Kosovo has taken several steps to improve energy efficiency but needs to accelerate and prioritise the implementation of energy-efficiency policies. Energy-efficiency policies could reduce energy and carbon intensities and energy poverty. Kosovo adopted a law on energy efficiency in November 2018, but it has yet to be properly implemented. The Energy Efficiency Fund, established in 2019, is an independent and autonomous entity with its own governing body. This board of directors includes non-voting representatives from the World Bank and the European Union’s office in Kosovo who monitor the fund’s work and operations. The fund recently published calls for tenders for the implementation of energy-efficiency measures. It is important to accelerate these projects (European Commission, 2020[82]).

Along with transport (27%), the residential sector (38%) has the highest final energy consumption in Kosovo due to poor insulation of buildings, and many people cannot afford to pay their energy bills. About 29% of household costs are spent on housing, with the energy bill a main component. On average, 43% of Kosovars are unable to pay their utility bills and similar payments on time at least twice per year (Kosovo Agency of Statistics, 2016[150]) (see the People section in this chapter). Energy poverty is not defined and not monitored in Kosovo (Robić, 2016[151]).

Energy production based on brown coal and the development of small hydropower plants have a detrimental impact on Kosovo’s environment and water resources. The planned new Kosova e Re coal plant close to Priština, estimated at EUR 1.3 billion (see Partnerships and financing section in this chapter), will not significantly reduce the existing negative impact of electricity production on air pollution and health in the capital and its surroundings. The number of hydropower plants increased between 2009 and 2018, and their capacities increased from 45.8 MW to 83 MW. This is despite Kosovo having limited hydropower potential and being water poor compared to its neighbours. However, the planned capacity is fixed at 120 MW by 2020 (initially 240 MW) by the National Renewable Energy Action Plan (Government of Kosovo, 2013[154]). New small hydropower plants have an impact on water resources and on the preservation of biodiversity. Several built and planned plants are in national parks (Gallop, Vejnovic and Pehchevski, 2019[155]). Kosovo should ensure that new hydropower projects comply with the EU acquis on concessions and the environment (European Commission, 2020[82]).


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← 1. Calculation based on European Commission fatal accidents data (European Commission, 2019[7]) and SEE Jobs Gateway employment data (World Bank/Vienna Institute for International Economic Studies, 2020[23]).

← 2. Calculation based on World Health Organization data (WHO, 2018[159]).

← 3. Three in four firms attempting to fill a higher-skilled position and three in five attempting to fill a medium- to lower-skilled position encountered difficulties related to applicants’ lack of skills and/or experience (World Bank, 2019[17]).

← 4. Information obtained from interviews at the OECD fact-finding missions in Pristina.

← 5. The reservation wage is the lowest wage that a person is willing to accept in order to become employed. An increase in the reservation wage can contribute to higher inactivity rates and can incentivise wage growth, especially if labour supply is constrained or if skilled labour is in short supply, as has been the case in Kosovo.

← 6. As in most of the Western Balkans, kinships have a long historic tradition. In Kosovo, the centuries-old social and political village structure based on kinships became crucial to the provision of education and health services to the local population during the struggle for greater autonomy in the 1990s. Today, kin-based networks are in decline but seem still to explain part of relationships among individuals (Efendic and Ledeneva, 2020[76]).

← 7. According to the Law on Local Self-Government (Law No. 03/L-40), the municipalities of Gracanica, Mitrovica North and Štrpce have enhanced competences for the provision of secondary health care, including registration and licensing of healthcare institutions, recruitment, payment of salaries and training of healthcare personnel and administrators. Mitrovica North has similarly enhanced competences for the provision of higher education. All municipalities in which the Kosovo Serb community is in the majority have enhanced competences for the management of cultural affairs.

← 8. Kosovo Albanian teachers and university staff organised classes in alternative makeshift facilities, such as private houses, basements and garages, under the co-ordination of the Democratic League of Kosovo and with the financial support of informal municipality-level tax collection and remittances; 20 000 teachers and non-teaching staff supported around 300 000 students in 400 primary schools, 50 000 students in 65 secondary schools and approximately 10 000 university students in 20 faculties (Selenica, 2017[156]).

← 9. In 2017, property taxes represented 34% of own revenues, followed by land development fees (28%), communal fees and charges (31%) and education and health fees (6%) (NALAS, 2018[158]).

← 10. Central parties can steer the local hiring of public employees even at relatively low hierarchical levels. In 2012, for example, a minister forced through the employment of a security guard in a Kamenica school that was initially opposed by the local mayor (Jackson, 2018[157]).

← 11. The budget allocated to the academy increased by more than 20% from 2017 to 2018.

← 12. There are also 44 locally managed POEs in the transport (23), water and waste management (12), public housing (3), energy (2) and wholesale trade (2) sectors. Hereafter, subnational POEs are excluded from analysis, since consolidated information about their financial situation and employment is not available.

← 13. With 4 000 employees, Korporata Energjetike e Kosoves in the energy sector is the largest POE by number of staff. It is the only POE to have registered profits in 2016 (EUR 11 million) and a positive return on equity in both 2015 and 2016 (7.4% and 10.8%, respectively).

← 14. Registration costs have been decreasing. Still, it can take a company 6 procedures, 32 days and up to EUR 500 (including notary fees) to register a property (Worldometer, 2020[119]).

← 15. Kosovo A and Kosovo B are on the top ten polluter lists for PM2.5, SO2 and NO2 (HEAL, 2016[124]).

← 16. The ecological tax is collected as part of the annual vehicle registration.

← 17. Kosovo’s water and wastewater sectors rely heavily on financial support from the international donor community (see the Prosperity, and Partnerships and financing sections in this chapter). For example, between 1999 and 2011, the government allocated EUR 66 million from the budget for capital investment in the water sector, while the international donor community allocated around EUR 190 million (Government of Kosovo, 2016[138]).

← 18. Non-volumetric pricing for irrigation in Kosovo is based on units of land (ha).

← 19. The EU Third Energy Package aims at liberalising gas and electricity markets and empowering energy consumers.

← 20. “On 20 December 2019, the Energy Community Secretariat sent an Opening Letter to Kosovo in Case ECS-4/19, addressing its concerns with regard to the illegality and existence of State aid in relation to the Kosovo e Re project. In particular, the Secretariat preliminarily found that certain measures, such as energy and availability payments over 20 years under the power purchase agreement, the sale and transfer of the plant site under market value, a state guarantee, a VAT exemption, and taking over several charges and costs constitute state aid. These measures have not been notified to the competent State aid authority and therefore constitute per se illegal state aid” (Energy Community Secretariat, 2019[149]).

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