Kosovo heads for ruin while its watchdog looks on

The Guardian

The fiscally irresponsible Kosovan government is messing up its IMF programme – but the International Civilian Office fails to act

Andrea Capussela

The IMF is expected to make an announcement later today in which it declares Kosovo's programme to be off-track. This would be a rare event, because governments seldom break their commitments to the IMF. 

Since its controversial declaration of independence in 2008, Kosovo has struggled to be accepted in the international community; recognized by fewer than half of the UN member states, its only success so far was to enter into the IMF and the World Bank. It wanted an IMF programme to strengthen its credibility and to satisfy conditions tied to large grants from the EU and the World Bank. Now, however, both money and credibility look to be lost, and the irresponsibility of its government is leading Kosovo towards a fiscal crisis.

How could this happen, in the world's most closely supervised nation? Kosovo is very poor. It exports almost nothing but its workers, and its economy still depend on their remittances and international aid. Widespread unemployment, poverty and corruption breed growing discontent. But its incompetent and often predatory elite is free from accountability: the judicial system is dysfunctional and subject to political interference, civil society weak and elections – regularly tainted by fraud – attract less than half of the voters.

Kosovo used to be a neglected province of Serbia. But after its secession the contrast became even starker: although Serbia still suffers from the legacy of the wars and isolation of the 1990s, the quality of its democracy is better, its economy stronger, and now – after the arrest on Thursday of Ratko Mladić, its hopes of EU membership took a leap forward.

To help Kosovo mature into a more open and stable society, its institutions were placed under the supervision of a watchdog – the International Civilian Office (ICO), whose economics office I led until last March – whose mandate covers anything between human rights, economic policy and trade in church candles. This mandate was backed by strong remedial powers for whose exercise, however, the ICO had to rely on the political power of its European and American masters. And these masters have diverging interests.

Kosovo owes its independence to the US, and the US continues to exercise huge influence; yet, an ocean away, Washington can afford to be uninterested in the long-term development of Kosovo, and uses its influence to serve its own bilateral interests and ensure short-term political stability. Conversely, to European eyes Kosovo is the most problematic corner of a still unstable enclave – the western Balkans – locked within the EU's borders, and a source of increasingly unpopular migration. Europe, unlike the US, has a stake in its development and provides most of the aid, but lacks influence (mainly because the EU is divided: five member states do not recognise Kosovo).

These differences are highlighted by the episode that felled the IMF programme. On the eve of national elections the government promised civil servants a pay rise of 30% to 50% (by way of comparison, a week into the protests that brought him down, Egypt's president Mubarak promised a 15% salary increase). This fundamentally wrong measure opens a large gap in a budget already strained by the construction of an expensive and relatively unnecessary highway (this controversial tender was won by US's Bechtel, in consortium with a smaller Turkish company; the contract, unusually negotiated after the tender, uses a cost-plus formula which could push the final price well above current estimates, which exceed 20% of GDP: in Albania, the final price of a highway built by the same consortium with a similar contract was more than twice the initial estimate).

The European commission, the IMF and others sharply criticized the pay rise. Alone, the US defended it. With US support, and (astonishingly) the praise of the ICO's head, the government implemented it. In the following weeks the elite gladly allowed the US ambassador to micromanage the formation of a new government and the election of two consecutive presidents (one election was illegal).

It would be pointless to criticize these policies, or contrast them with President Obama's recent speeches on reform in the Middle East: Washington has little interest in Kosovo, except that of keeping it friendly, and acts accordingly. The problem, rather, is that the EU allowed itself to be sidelined and the ICO remained silent.

Under US influence, the ICO lately seems interested only in preserving the appearance of a multi-ethnic society; so that now the Serbian Orthodox monasteries (still under NATO protection) can buy their candles tax-free, but corruption grows, the economy stagnates and the elite is extending its influence across Kosovo's institutions, economy and society, in what looks increasingly like a form of state capture. The ICO's silent presence is damaging Kosovo: it should either act or leave.

The ICO failed also as an experiment of a joint EU/US mission, and rather became yet another example of how the US used Balkan crises to assert and strengthen its influence over Europe.

If a form of international supervision is foreseen for a possible post-Gaddafi Libya, this precedent ought to be borne in mind. The supervisor should be given a narrower mandate, focused on governance. Economic policy should be left to specialist institutions, with the supervisor lending them its muscle. And, crucially, the supervisor should be placed under the political guidance of powers that have influence and the incentive to make good use of it.

If faced by a fiscal crisis, Kosovo will ask to be bailed out by donors. This would reward irresponsibility, protect the government from accountability to its citizens and merely postpone the crisis. Regrettably, though, donors might oblige.