Contacts: Washington -Gina Ciagne (202) 458-4166
Email: Gciagne@worldbank.org
Chris Walsh (202) 458-2710
Email: Cwalsh@worldbank.org
Brussels -Rachel Winter Jones (322) 552-0052
Email: rjones1@worldbank.org

World Bank Group Response
to Post Conflict Reconstruction in Kosovo:
General Framework For an Emergency Assistance Strategy

The situation in the Balkans has evolved rapidly over the course of the last several weeks. The conflict has stopped and there is a tenuous peace in Kosovo. Yugoslav forces have completed their departure from Kosovo and NATO peacekeeping troops have been deployed. Hundreds of thousands of the nearly 1.5 million refugees and internally displaced have begun the process of returning to their homes and rebuilding their lives.

However, the legal status and governance arrangements for an autonomous post conflict Kosovo within the Federal Republic of Yugoslavia (FRY) are not yet fully clear. Adding to the complexity, because most of the severest damage is quite recent, there is little concrete knowledge yet of actual damage on the ground at this stage. And as a result of many years of conflict in the region, knowledge of the economic situation and prospects of Kosovo is scarce. Moreover, reconstruction and recovery will need to be well coordinated with the humanitarian effort underway to return refugees and the displaced. Bringing peace and prosperity to Kosovo is likely to be a most complicated post conflict challenge for the international community.

This note sets out a framework for an emergency assistance strategy for World Bank Group support to Kosovo's reconstruction and recovery over the next 12-18 months. The UN Security Council Resolution that brought an end to the recent conflict recognizes the need for a coordinated international effort to support Kosovo's reconstruction and recovery. It is in response to the call for such an international effort that a World Bank role is proposed. This strategic framework also builds on recent efforts to set a political framework for peace and stability in the Balkan region (through the EU-proposed "Stability Pact"), and on the special World Bank-European Commission (EC) partnership for coordination of the international donor response to conflict in the Balkans. Building on the World Bank's comparative advantage, this note explains the important role for the institution in the areas of policy advice and donor coordination, aimed at helping to ensure the efficiency and sustainability of the overall international effort in Kosovo.

I. Background: Regional Crisis and the Path to Peace

Recent Events

Crisis in Kosovo. While ethnic tensions in Kosovo have a long history, the most recent crisis evolved as hostility increasingly built up between the Yugoslav authorities and an emerging Kosovo Liberation Army (KLA) in the period following the end of the war in Bosnia and Herzegovina in late 1995. In early 1998, Serb troops entered Kosovo and there was sporadic fighting during the rest of the year. In early 1999, agreement on a truce was reached and the Yugoslavs and Kosovar Albanians met at Rambouillet in France, to hammer out an internationally-brokered peace accord. Negotiations broke down, however, without agreement. While the Kosovars signed the accord, the Yugoslav government did not.¹ After renewed hostilities, NATO threatened to use force to reach agreement, and on March 24, 1999, began bombing Yugoslavia. The subsequent months saw a large-scale exodus of ethnic Albanians from their homes along with widespread destruction. The last few months' events in Kosovo are the most recent outbreak of a longer-term regional crisis that began in the late 1980s with economic decline and break-up of the former Socialist Federal Republic of Yugoslavia (SFRY) that led to war in 1992-1995 and international economic sanctions on the remaining republics of FRY (Serbia and Montenegro). The prolonged crisis associated with the break-up of SFRY has affected the whole Balkan region - its current epicenter is Kosovo, but its impacts reach to neighboring Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Former Yugoslav Republic of Macedonia, Romania and beyond - and has left FRY in a deep state of economic shock.

Agreement to Peace Principles. After nearly three months of NATO airstrikes, the Yugoslav Government agreed to peace principles proposed by the G-8 on June 3, 1999. Yugoslav troops began their withdrawal on June 11, and NATO suspended bombing the next day. Immediately following the military agreement, the UN Security Council approved a Resolution that recognized the end of hostilities, authorized deployment of an international security force (Kosovo Force, or KFOR) and establishment of an international civilian presence, the UN Interim Mission in Kosovo (UNMIK) under the control of Kosovo's Special Representative, Bernard Kouchner². The Resolution calls for "substantial autonomy and meaningful self-administration for Kosovo," while recognizing the "territorial integrity of the FRY." It also "reaffirms the right of all refugees and displaced persons to return to their homes in safety." While the broad mandates of both KFOR and UNMIK are set out in the Resolution, the detailed accountabilities and specific arrangements for both are currently under discussion. There has been more progress on military than civilian matters. The peace agreement provides a general framework, but is by no means a blueprint for post conflict governance.

The Emerging Civilian Administration. The Resolution establishes a UN-managed civilian administration as part of FRY's Republic of Serbia, to be replaced over time with democratic self-governing local institutions. A UN task force (under the Secretary-General) is now drafting arrangements for UNMIK. It will have four main "pillars" or areas of accountability: (i) refugees/humanitarian; (ii) democracy/governance; (iii) military/security; and (iv) economic/reconstruction. It is expected that UNHCR, OSCE/UN, NATO and the EU will, respectively, take the lead in each of these four areas. The UN is to craft the framework for this administration (taking into account the drafted Rambouillet accords) by July 15, and has requested the assistance of the Bretton Woods Institutions to advise in the development of pillars (ii) and (iv). Critical aspects of the civilian administration - in particular regarding economic management - are to be determined in the coming weeks, and will have a significant impact on both the economic future of Kosovo as well as the World Bank Group's possible involvement there.

Kosovo: Political and Economic Context and Crisis Impact

Governance. As a province of Serbia and the largest republic in the former SFRY, Kosovo had a significant degree of autonomy under the 1974 Constitution. While not considered de jure equal to the six former republics, the province had in a de facto sense similar rights and obligations. Following a 1989 constitutional change, however, Kosovo's autonomy was significantly restricted: Serbia was given control over Kosovo's police, courts, and social, economic, and education policies. The predominant response to this among Kosovar Albanians was to support parallel Albanian-language institutions rather than the Serb governing structures. In 1992, an assembly of the "Kosovo Republic" was informally voted in, and the head of the Democratic League of Kosovo, Ibrahim Rugova, elected its President. This parallel administration was funded by a 3 percent tax on diaspora remittances and a 5 percent tax on domestic economic activity. A parallel network of services, in particular education and health, were relatively well developed. Frustrated with passive resistance, however, by 1996 the KLA had emerged openly. It has become a significant political force as a result of the past year of open conflict. The KLA has recently agreed to demilitarize and disarm; it is likely that some of its former members will play a part in a new local government. However, there is little clarity on the makeup of a local government that would take over from the UNMIK once local elections, planned to take place in one year, are held.

Pre-Conflict Economy. Kosovo was traditionally FRY's poorest province. While the reliability of economic data for the province is limited and unreliable, it now thought that as a result of the impact of conflict and international economic sanctions, Kosovo's GDP contracted by 50 percent from 1990 to 1995, falling to $720 million, or less than $400 per capita (lower than Albania, Europe's poorest country). Most economic activity had been 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. These sectors, responsible for about 37 percent of GDP in 1995, were characterized by state/social ownership and low productivity. Agriculture was also important, responsible for 34 percent of 1995 GDP. About 60 percent of the pre-conflict population lived in rural areas. Unemployment was already high, at over 35 percent in 1995, due to the long-term impacts of regional crisis. The unemployment rate was 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 reached $975 million, or on the order of 70 percent of GDP.³

Impact of the Conflict. As most damage occurred between March 1999 and the present when access was impossible, damage assessments are not yet available. However, the conflict has undoubtedly caused massive devastation and severe economic collapse. First, the human toll: of the 1.8 million inhabitants of Kosovo (80 percent ethnic Albanian; 10 percent Serb; and 10 percent other), over 850,000 Kosovar Albanians had fled to neighboring Macedonia, Albania and the Republic of Montenegro (plus tens of thousands to other countries) by the end of the hostilities. Some 600,000 were thought to be internally displaced. An unknown number had been killed and wounded. More than 100,000 Serbs had also fled Kosovo.⁴ Though it now seems that there has not been widespread starvation among those remaining in Kosovo, privation and hardship have been extreme. A major humanitarian effort is underway to assist the return of refugees and the displaced. Physical damage to the economy is certain also to be significant.

Other important near-term needs are employment and restart of economic activity, including agriculture, an important pre-conflict source of income. 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. With the multi-faceted nature of this crisis in a previously relatively developed context, the UN has characterized Kosovo as a "new type of complex emergency" that will require a coordinated international effort and strategic partnerships, in particular the need to ensure smooth transition from humanitarian aid to reconstruction.

The International Response to Regional Crisis

The Impact of Crisis on the Region. While the suffering of Kosovo's ethnic Albanian refugees and displaced has been the most painfully visible consequence of the recent conflict, the crisis has also had broader regional impacts. Refugees have put a huge strain on social and economic infrastructure in Albania and Macedonia; disruptions in trade and transport have hurt Bosnia and Herzegovina and Macedonia, for whom FRY has been a major export market; Bulgaria and Romania are forced to find alternative - and more costly - transit routes around FRY. Tourism has been affected in Croatia, and the crisis has adversely affected the confidence of foreign investors more broadly in the region, as well as increasing countries' risk premium on capital market borrowings. Lost export earnings, trade diversions, and potentially higher debt service costs have brought wider balance of payments gaps, while budgetary gaps have increased with lost fiscal revenues as a result of lower incomes, and from disruption of customs collection and expenditures related to refugees. Importantly, the crisis could result in the postponement of structural reforms which will affect longer term development goals of these countries. Meanwhile, FRY has suffered massive economic contraction as a result of the conflict. A recent UN humanitarian mission reports the dire situation of civilians in all areas of the country - not only Kosovo - and notes a burgeoning unemployment crisis. It highlights the special vulnerability of women, children, the elderly and the displaced. The report notes the need for humanitarian aid to both Kosovo and Serbia to avoid severe hardship this winter, and the dramatic need for budgetary support in Montenegro.⁵

Meeting Near-Term Economic Needs. The international community's immediate humanitarian response to crisis in the region has been swift. In the context of a special international meeting during the April 1999 Spring Meetings of the Bretton Woods Institutions, the IMF and the World Bank presented an initial assessment of the cost of the crisis to the six most-affected countries of the region (excluding FRY), and these assessments have been periodically updated and presented to donors over the last two months. The most recent IMF 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 gap for the 6 countries is now estimated at US$1.0 billion⁶. While incremental international assistance, including from IBRD and 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. No economic impact assessments have yet been completed for FRY or Kosovo.

A Medium-Term "Stability Pact" for the Balkans. To address the more medium- to long-term needs for lasting peace and stability in the region, G-8 Foreign Ministers have endorsed an EU-proposed "Stability Pact" that provides a broad political framework for the Balkan countries to accelerate their integration into the Euro-Atlantic structures, and proposes in particular special arrangements for beginning the process of EU accession.⁷ The Stability Pact envisions the Balkan countries successfully making the transition to market-based economies. FRY is seen as a critical partner, eligible to join the Pact once political conditions there change. The Pact establishes a political coordination mechanism that includes the creation of a "Southeastern Europe Regional Table" and the appointment of a Special Coordinator. Under the Regional Table, three "Working Tables" would be established, on democratization and human rights; on economic reconstruction, development and cooperation; and on security issues.

EC-World Bank Partnership. Building on the existing collaborative work on a country-by-country basis in the region, the EC and the World Bank have been given a special mandate for coordinating donors' economic assistance in the Balkans (endorsed by the April 1999 international meeting). Under this mandate, the two institutions are responsible for "coordination of matters related to the economic recovery, reform and reconstruction of the Southeast European Region," including mobilizing donor support, providing economic analysis, developing appropriate conditions and implementing projects.⁸ Agreement has been reached on a coordination structure which envisages the creation of a "High Level Steering Group" that would oversee the economic recovery and reconstruction mandate, and an expert-level working group with which the Bank and the EC would be dealing on an ongoing basis. Membership in both groups would be kept small to ensure a light, efficient and workable structure. To implement this joint mandate, an EC-World Bank joint office in Brussels has been opened and a website providing information on the Balkans launched. The Stability Pact notes the EC-World Bank mandate for coordination of economic assistance to the region.

II. Considerations in Designing a World Bank Group Strategy

The Medium-Term View For Kosovo

The outlook for the medium-term in Kosovo is highly uncertain. The UN Resolution does not define Kosovo's legal status. Much will depend on the establishment in the near term of workable governance arrangements that create economically and politically viable autonomy within FRY, on the ability of the Kosovars to form a credible local government and local institutions, and on progress putting in place policy reforms that promote reconstruction and lead to sustainable recovery. While Kosovo's future will also depend on the political future of FRY, economic growth and prosperity in Kosovo is clearly a prerequisite to its stability. It is also a precondition to stability in the broader region. Our near-term strategy assumes that Kosovo's future will not be resolved in the next 12 months, but that regardless of developments, economic reconstruction and recovery - and a start to economic reforms - will be essential in the near term.

The World Bank's Mandate

Forming Part of an International Effort. Our involvement will be guided by our mandate, as reflected in the Articles of Agreement. Within the limits governing our activities in a non-member country, we are ready to respond to the encouragement for international organizations, confirmed in UN Resolution 1244, to contribute to economic reconstruction in Kosovo and to coordinate our activities with those of other partners. The following considerations are also important:

• Special Partnership with the EC. As noted, during the Spring meetings the Bank and the EC have been given a joint mandate to ensure donor coordination in the Balkan region. Within this special partnership, the Bank's comparative advantage is in identifying priority investments, assuring coherence and consistency of investments by avoiding gaps and overlaps and identifying policies that will help ensure efficiency and sustainability of donor support. Aid coordination, development of reconstruction and recovery programs and priorities, and support to reconstruction in Kosovo are consistent with that joint mandate.
• The Bank's Role in Reconstruction. Much of the initial work in Kosovo will be of a humanitarian nature, related to refugee return and the needs of those who remained, many of whom may be elderly, widows and children. Reconstruction must be closely linked with the humanitarian effort and reconstruction agencies must work closely with UNHCR and the other humanitarian/relief agencies and NGOs. The Bank will seek to coordinate with and build on the work of humanitarian agencies (as learned in Bosnia and Herzegovina and elsewhere). The Bank's involvement, however, will be related to reconstruction and economic development - and the transition from humanitarian to reconstruction - and not humanitarian aid itself.

Working in the Territory of the FRY

FRY and the Region. Support for Kosovo is inextricably linked to support for the broader Balkan region. Kosovo is the first step to a broader eventual involvement in FRY

(Serbia and Montenegro) when political conditions there allow- which will be essential to lasting economic recovery for a region that has been held back economically by a decade of conflict and crisis.

• Non-Membership. FRY is not a member of the World Bank Group (or the IMF),⁹ and the country has some US$1.6 billion in arrears to IBRD. Before issues of membership, FRY would be required to eliminate, or agree with the Bank on a plan to eliminate, these arrears. Thus, no regular IBRD or IDA funds will be available for Kosovo, and any financial support would be limited to special assistance grants as in the case of Bosnia and Herzegovina and the West Bank and Gaza. Inability to use regular lending - and the Bank's constraints on the availability of special assistance grants- will mean limited assistance for Kosovo, and will drive a need for selectivity in any financial support.
• Implementation and Policy Hurdles. There are likely to be difficulties in establishing and maintaining a relationship with Kosovo in the absence of the formal membership of FRY. While the UN Resolution establishes the principle of autonomy, implementation and policy-related issues related in particular to contact with Belgrade could have an impact on effectiveness. Potential issues include ensuring proper access of goods and people to Kosovo, clearance of goods and people through borders, and assurances from Belgrade regarding FRY's cooperation in areas important to both operational and policy aspects of our involvement, among them revenue raising/sharing, customs policy, monetary policy and operation of network infrastructure. Many of these issues may become clearer in the course of the next few weeks as the civilian administration arrangements are defined.

The following paragraphs set out a preliminary approach for an emergency assistance strategy. With progress on economic work and damage assessments, as well as clarification of Kosovo's legal status and governance arrangements, this framework will be developed and presented, in late summer, in a fuller strategy document that would include a specific proposal for use of any authorized special resources.

Rationale. The rationale for World Bank involvement in post conflict Kosovo rests largely with the UN-initiated call for a coherent international response to the crisis there. It is also based on the World Bank's joint mandate with the EC for coordination of economic assistance in the Balkan region. Given the large potential financing roles of other donors, the World Bank Group can use its comparative advantage in policy reform and institution building to help ensure sustainability of the broader donor effort.

Objective. The objective of the proposed assistance strategy for Kosovo is to support with technical and exceptional non-regular financial assistance reconstruction and recovery efforts in the next 12-18 months. Because of current uncertainties about Kosovo's future legal status - and its economic viability if the present uncertainties persist - the strategy is limited to one of a near-term emergency nature. Its focus would be: assistance in designing the reconstruction and recovery program; policy advice in economic management, including building government institutions; and selective financial assistance for reconstruction and economic re-startactivities, support of government budgets and institutions and initial transition and social reforms, provided special resources become available.

• Developing a Reconstruction and Recovery Program. There are three main tasks associated with this effort. First, preparation of damage assessments and development of a program for physical and institutional rebuilding, jointly with the EC, that would identify priority investments and appropriate sectoral policies. Second, planning, preparing and co-hosting, jointly with the EC, donor conferences to mobilize donor support. Third, aid coordination and monitoring through a donor database, also with the EC and under the umbrella of the new joint office in Brussels. All of these activities have been planned and are underway. The Bank may also explore the preparation of projects for other donors through cooperation arrangements.
• Building Economic Policies and Institutions. Given our comparative advantage and the likely scarcity of other donors in this area, economic policy advice would a primary area of emphasis. We are developing a coordinated approach to this work with the IMF that will ensure complementarity. Development of an economic assessment (e.g., institutions and policies for fiscal management, monetary and banking arrangements, structural issues in particular related to privatization and private sector development, and social protection/poverty-alleviation) would be an important element of support. This work would also involve advising the UN on design of economic institutions and policies, including monetary and fiscal policy, banking, trade and other issues (this work is now underway); and, importantly, working directly with the eventually designated Kosovo government authorities on building economic institutions and policies.
• Implementation Through Financial Support for Reconstruction and Policy Reform. We would plan to limit any financial support to those areas where we had a clear mandate and comparative advantage and where we believe there may be gaps because other donors will not be as involved. We would also seek to maximize the impact of our resources by leveraging those of other donors through cofinancing. Development of a sound strategy will require a better knowledge of needs - to be gained as the damage assessments are prepared and completed - as well as of other donors' programs. In formulating this strategy, we will build on the lessons learned - both successes and areas where another approach might have been more effective - in other post conflict situations.

With some of these lessons in mind, our preliminary view is that near-term priorities are likely to include support to the restart of economic activity and employment, including agriculture, and network infrastructure that may be a bottleneck to economic activity.¹⁰ One likely early vehicle to provide incomes and employment would be funding of local community projects through a simple social fund or other related scheme. Sector operations that provide a platform for broad donor support - electric power, transport, agriculture, and/or lines of credit would be early possible candidates. Such platform projects would seek to identify and ensure policies oriented towards efficiency and sustainability. The Bank will also consider supporting policy-based operations that provide badly-needed budgetary resources in support of local institution and fiscal management, as well as initial transition reforms related to development of a functioning private sector, and strengthening of social services.

As noted, a fuller strategy will be presented to the Board late summer, including a proposed structure for use of any special resources, once Kosovo's legal status and civilian governance structure is defined, and once initial damage assessments are completed.

In terms of donor meetings, in agreement with the EC (and in consultation with other donors), a phased timetable for donor meetings - similar to that employed in the case of Bosnia and Herzegovina - has 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 would be held in October for urgent reconstruction needs, and a third, high-level donor meeting to support full-scale medium-term reconstruction needs would be held in early February 2000.

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. It is expected that both reports would be ready in preliminary form in late September, in time for the planned October donor meeting. Revised versions of both reports - on the basis of more extensive field visits - would be completed by end December, for the planned high-level donors meeting on medium-term reconstruction needs in February 2000.

July 1999

1 Draft Interim Agreement for Peace and Self-Government in Kosovo.

2 UN Security Council Resolution 1244, June 10, 1999.

3 Data from Economic Activities and Democratic Development of Kosova, RIINVEST, 1998. Note that economic data on Kosovo are scarce; what little exist may not be reliable.

4 Based on UNHCR data.

5 Report of the Inter-Agency Needs Assessment Mission, Dispatched by the Secretary-General of the United Nations to the Federal Republic of Yugoslavia, June 9, 1999.

6 Interim IMF reassessment as of July 1999, assuming that most refugees will return to Kosovo before the end of the year.

7 Stability Pact For South Eastern Europe, June 10, 1999.

8 Paper on Coordination Arrangements for the Economic Recovery and Reconstruction of the Balkans in Response to the Kosovo Crisis, European Union Commission and World Bank, June 10, 1999.

9 World Bank Group membership ceased in 1993.

10 Our assessment of the 1996-1998 reconstruction program in Bosnia and Herzegovina indicates that while early emphasis on network and other physical reconstruction led to early successes, more could have been done early on to regenerate economic activity and put in place the legal and policy framework for private activity needed to build and sustain real growth. (Bosnia and Herzegovina, Review of the Priority Reconstruction Program and Towards Sustainable Economic Development, May 1999, World Bank/EU.)