REVIVING KOSOVO: A COMPLICATED CHALLENGE LIES AHEAD FOR INTERNATIONAL COMMUNITY
World Bank says helping Kosovo's neighbors with war-related losses also vital

BRUSSELS, July 12,1999 — Rebuilding Kosovo after its recent ordeal will prove a highly complicated challenge for international policy makers as they meet in Brussels tomorrow to map out an action plan for the battered province, and the wider Southeast Europe region, according to the World Bank.

Furthermore, the Bank says that jumpstarting Kosovo's stationary economy will only be possible within a broader strategy of repairing the economies of neighboring countries particularly Albania and former Yugoslav Republic of Macedonia as well as Bosnia and Herzegovina, Bulgaria, Croatia, and Romania which also suffered economic losses as a result of hostilities. However, in supporting Kosovo and the rest of Southeastern Europe, the Bank warns that new long-term financing needs should not be funded at the expense of dwindling overseas development assistance for the poor in other parts of the world.

Speaking at a press briefing before the inaugural meeting of the High-Level Steering Group¾ a special World Bank-European Commission (EC) chaired partnership for coordinating the international donor response to conflict in the Balkans¾ the Bank said that reviving Kosovo's economy would be complicated by the fact that, after years of regional conflict and sanctions imposed against the Federal Republic of Yugoslavia, the province was already one of the poorest areas in Southeastern Europe long before the recent hostilities:

Official statistics indicate that from 1990 to 1995, Kosovo's GDP contracted by an estimated 50 percent, falling to less than $400 per capita (lower than Albania, Europe's poorest country). Most economic activity was centered on mining and the production of raw materials and semi-finished products (metals, and energy), largely sold at below-cost prices to other republics.

Agriculture was also important, responsible for about one third of 1995 GDP. Unemployment was already high before the conflict with joblessness disproportionately high among ethnic Albanians. The province was heavily indebted: large-scale investments in heavy industry and energy during the 1970s and 1980s had been financed by debt on commercial terms. In 1987, Kosovo's foreign currency debt was estimated to reach $975 million, or on the order of 70 percent of GDP.

"Available information on Kosovo's economic conditions is spotty and unreliable at best, but what we do know is that the province has been battered socially and economically by the recent hostilities," says Christiaan Poortman, the World Bank's Southeast Europe Coordinator and Country Director, who will lead a Bank fact-finding mission into Kosovo on Wednesday. "Although it now seems that though there was not the widespread hunger and destruction that we had once feared, privation and hardship have been extreme. Restarting economic activity and producing jobs are two immediate priorities now that many of Kosovo's refugees have either returned home or are on their way."

In a new framework paper to guide its post-conflict work in Kosovo, the World Bank states: "Much of the challenge, however, will be rebuilding an economy that had already fallen into substantial decline prior to the latest crisis, and ensuring a sustainable recovery based on transition from a socialist to a market-oriented economy. The multi-faceted nature of this crisis will require a coordinated international effort and strategic partnerships, in particular the need to ensure smooth transition from humanitarian aid to reconstruction."

The Wider Impact of the Crisis

While the suffering of Kosovo's ethnic Albanian refugees has been the most painfully visible consequence of the recent conflict, the crisis has also had broader regional impacts. Sheltering refugees has put a huge strain on social and economic conditions in Albania and Macedonia; disruptions in trade and transport have hurt Bosnia and Herzegovina and Macedonia, for which the Federal Republic of Yugoslavia (FRY) has been a major export market; Bulgaria and Romania are forced to find alternative - and more costly - transit routes around FRY since the Danube River is blocked with the wreckage of bombed bridges. Tourism has been affected in Croatia, and the crisis has adversely affected the confidence of foreign investors in the region. Importantly, the crisis could also force the postponement of economic reforms which will affect longer term development goals of these countries.

The most recent assessment forecasts, under current assumptions, that economic growth is expected to slow on average by 3-4 percentage points in 1999 in these countries. The combined incremental 1999 balance of payments financing gap for the 6 countries is now estimated at US$1.0 billion. While incremental international assistance, including from the World Bank and its soft loans agency, the International Development Association (IDA), has been made available (at donor meetings held for Bulgaria, Macedonia, Bosnia and Herzegovina, and Albania in April and May), external financing requirements have only been partially met and a gap of approximately US$450 million remains.

"Reviving Kosovo will quickly run into some powerful obstacles without a regional framework that jumpstarts and improves economic and social conditions for all the affected countries of Southeastern Europe, " says Rory O'Sullivan, the World Bank group's Special Representative to Southeast Europe, based in Sarajevo. "While Kosovo's future will also depend on the political future of the Federal Republic of Yugoslavia, it's clear that economic growth and prosperity in the province and in the wider region is clearly a prerequisite for stability and a lasting peace in Southeastern Europe."

Next Steps for the International Partnership in Rebuilding Kosovo

This is new ground for the international community, which, at its inaugural meeting of the High-Level Steering Group this week in Brussels, will band together in a powerful coalition of partnerships to start the process of transforming Southeastern Europe. The Steering Group - comprising the United Nations, the European Union Presidency, the European Commission, the IMF, finance ministers from leading industrial countries, the World Bank and other development banks such as the European Bank for Reconstruction and Development and the European Investment Bank - meeting under the guidance of the World Bank and the EC, will coordinate the international donor response to the conflict in the Balkans.

The group will work closely with the new EU-sponsored "Stability Pact" which will devise a political framework for peace and stability in the Balkan region.

This week's debut of the High-Level Steering Group in Brussels will lay the groundwork for a series of follow-up donor meetings set for late July and following months. A phased timetable - similar to that used in the case of Bosnia and Herzegovina - has now been set. A first donor meeting - designed to raise funds for the humanitarian/refugee return program and for civilian administration - will be held on July 28 in Brussels. A second donor meeting will be held in mid-Autumn to raise reconstruction needs. Further donor meetings will be held as needed.

In the meantime, task teams have been mobilized to: (i) prepare damage assessments and develop a reconstruction program; and (ii) develop economic assessments and an initial economic report. The initial versions of both reports would be ready in preliminary form in time for the planned mid-Autumn donor meeting.

"This impressive coalition of international partnerships can this week formally start the process of helping Southeastern Europe forge a new, more promising direction for itself," says Christiaan Poortman, the World Bank's Southeast Europe Coordinator. "We should keep two thoughts uppermost in our work: that the best foundation for peace is economic prosperity, and that our commitment to the people of Southeast Europe is for the long-haul, long after the television cameras and the refugee camps have gone."