Kosovo’s Transition towards a Free-market Economy

PART III POSTCONFLICT ADMINISTRATIONS IN PRACTICE

1. Kosovo’s Transition towards a Free-market Economy

As a consequence of years of conflict and under-investment in industry and the damage caused by NATO’s military intervention, the economic situation in Kosovo was very precarious at UNMIK’s establishment. In addition, the departure of the Serbs from the administration had left the territory with no functioning financial system.560 Economic reconstruction in Kosovo was very intrusive. The EU was charged with the economic component of the mission in Kosovo (Pillar IV ‘economic reconstruction’), tasked with “[s]upporting the reconstruction of key infrastructure and other economic reconstruction”.561 The main aim was the establishment of a market-based economy, in line with the EU’s expectations.562 The EU’s approach in Kosovo was based on the conclusions of the European Council in Copenhagen, which set out the economic conditions for member- ship of the EU, and those of the April 1997 Council of Ministers defining the conditions for contractual relations with the EU.563 The EU’s focus was placed on both the restoration of elementary public services and the privatisation of public companies.564

In the emergency phase, UNMIK issued a regulation permitting the unre- stricted use of foreign currencies in transactions.565 The Deutschmark was

560 Report of the Secretary-General, UN Doc. S/1999/779, supra note 117, para. 16.

561 SC Res. 1244, UN Doc. S/RES/1244 (1999), para. 11, g).

562 Report of the Secretary-General of the United Nations Interim Administration Mission in Kosovo, UN Doc. S/1999/779 (12 July 1999), para. 103.

563 European Commission, Kosovo (under UNSCR 1244) 2005 Progress Report, Doc. Nr. SEC (2005) 1423 (9 November 2005), p. 27.

564 Ibid.

565 UNMIK Regulation 1999/4 on the currency permitted to be used in Kosovo, UN Doc.

UNMIK/REG/1999/4 (2 September 1999).

established as the official currency of the Kosovo institutions and agencies.566 The Special Representative based this much contested decision567 on the fact that the Deutschmark was already used in commercial transactions and that the Yugoslav Dinar would not be attractive to foreign investors.568 Following the re- establishment of a customs administration and revenue collection,569 UNMIK, in addition to the donor grants, added customs and tax revenues to its incomes in the emergency phase. The rehabilitation of the financial sector was seen as a priority in order to enhance economic reconstruction. UNMIK quickly estab- lished a ‘Central Fiscal Authority’ to oversee the management of the Kosovo Budget,570 and a ‘Supervisory Board for Payment Operations’ and ‘Banking and Payment Authority’ to reorganise the banking and payment systems.571 UNMIK equally adopted regulations on the creation of private enterprises and corpora- tions, the international sale of goods and foreign investments, supplementary to the existing applicable legal framework.572 By March 2001, the emergency economic reconstruction programme was considered to have come to an end, and the focus shifted towards long-term sustainability.573

The creation of an economically viable entity of course requires long-term engagements. In addition, the transformation from a weak socialist economy, with an artificially high level of employment in state-owned enterprises, to a free-market economy necessitates many transformations. The majority of state- owned enterprises and socially-owned enterprises were as such not viable in a

566 UNMIK Administrative Direction 1999/2 implementing UNMIK Regulation 1999/4 of 2 September 1999 on the currency permitted to be used in Kosovo, UN Doc. UNMIK/

DIR/1999/2 (4 October 1999).

567 The decision was surprising considering the affirmation of the FRY’s sovereignty over the Province. Many saw the introduction of a foreign currency as paving the way for Kosovo’s independence.

568 Kouchner, B., Les Guerriers de la paix (Paris: Editions Grasset & Fasquelle, 2004 – édition Le Livre de Poche), p. 310.

569 UNMIK Regulation 1999/3 on the establishment of the customs and other related services in Kosovo, UN Doc. UNMIK/REG/1999/3 (31 August 1999).

570 UNMIK Regulation 1999/16 on the establishment of the central fiscal authority of Kosovo and other related matters, UN Doc. UNMIK/REG/1999/16 (6 November 1999).

571 UNMIK Regulation 1999/11 on exercising control over payments facilities and services, UN Doc. UNMIK/REG/1999/11 (13 October 1999) and UNMIK Regulation N° 1999/20 on the banking and payments authority of Kosovo, Doc. UNMIK/REG/1999/20 (15 November 1999).

572 See for an overview of legislation in the commercial sector: United States Agency for Inter- national Development (USAID), ‘Commercial Legal and Institutional Reform Assessment.

Diagnostic Assessment Report for Kosovo’ (September 2004).

573 Report of the Secretary-General on the United Nations Interim Administration Mission in Kosovo, UN Doc. S/2001/218 (13 March 2001), para. 52.

market economy.574 Privatisation was seen as one of the most urgent measures for transition towards a market economy.575 There were nevertheless doubts about the conformity of the privatisation of public companies with UNMIK’s mandate under Security Council Resolution 1244. This was the result of the maintenance of the Federal Republic of Yugoslavia’s sovereignty over the Prov- ince, which several UNMIK lawyers interpreted as limiting the administration’s capacity to engage in wide-scale economic reforms.576 UNMIK nevertheless embarked on massive privatisations of these former state- and socially-owned enterprises.577 It established a ‘Kosovo Trust Agency’578 to privatise 90 per cent of the total assets of these enterprises, and 50 per cent of socially-owned enter- prises by the end of 2006.579 The ‘Kosovo Trust Agency’ was charged with the administration and restructuring of these enterprises “as trustee for their own- ers”. The Agency was also given a mandate to decide on their privatisation.580 In line with the doubts raised by UNMIK lawyers, the establishment of the

‘Kosovo Trust Agency’ created strong opposition from the UN Legal Advisor and the Yugoslav institutions, which claimed that UNMIK ignored owner- ship over the assets of the enterprises, and lacked the legal capacity to engage in their privatisation.581 The privatisation process was therefore delayed until 2004, when the Kosovo Trust Agency’s mandate was redefined. The issue of the conformity of the privatisation with UNMIK’s mandate stresses the importance of exit strategies, and a clear-cut mandate, as these will have a direct influence

574 SRSG Michael Steiner explained that “We need to face reality and call a spade a spade. Most of Kosovo’s socially owned enterprises are dinosaurs. Even if we had the capital needed to rebuild them – and we don’t have it – we could not make viable enterprises out of them. It is time to acknowledge that the old economic approach has failed.” (UNMIK Press Release,

‘SRSG Michael Steiner Addresses University of Pristina on Privatization’, UN Doc. UNMIK/

PR718 (18 April 2002). See also Perritt, H. H., ‘Economic Sustainability and Final Status for Kosovo’, 25 University of Pennsylvania Journal of International Economic Law 270 (2004).

575 Demekas, D. G., Herderschee, J. and Jacobs, D. F., Kosovo: institutions and policies for recon- struction and growth (Washington, DC: International Monetary Fund, 2002), p. 19.

576 For a critique on this interpretation, see Perritt, supra note 574.

577 See in extenso on privatization in Kosovo, and the question of the FRY’s sovereignty, Zaum, supra note 75, pp. 155–168.

578 See UNMIK Regulation 2002/12 on the Establishment of the Kosovo Trust Agency, UN Doc. UNMIK/REG/2002/12 (13 June 2002) and UNMIK Regulation 2005/18 amending UNMIK Regulation no. 2002/12 on the establishment of the Kosovo Trust Agency, UN Doc.

UNMIK/REG/2005/18 (22 April 2005).

579 European Commission, ‘Kosovo (under UNSCR 1244) 2006 Progress Report’, Doc. Nr. SEC (2006) 1386 (8 Nov. 2006).

580 UNMIK Press Release, ‘SRSG Michael Steiner Addresses University of Pristina on Privatiza- tion’, UN Doc. UNMIK/PR718 (18 April 2002).

581 Report of the Secretary-General on the United Nations Interim Administration Mission on Kosovo, UN Doc. S/2004/71 (26 Jan. 2004), para. 35.

on the capacity of the international administration effectively to implement its mandate. In this particular case, the temporary nature of authority could have been interpreted as an argument against the privatisation. This, however, would not have been in conformity with the EU’s expectations, which had in addition been incorporated in a report of the Secretary-General.582 In addition, accord- ing to Security Council Resolution 1244, the EU was mandated to “develop a comprehensive approach to the economic development and stabilization of the region affected by the Kosovo crisis, including the implementation of a Stability Pact for South Eastern Europe with broad international participation in order to further the promotion of democracy, economic prosperity, stability and regional cooperation”.583 This broadly formulated mandate gave the EU a large margin of appreciation in the reconstruction process. It should nevertheless be stressed that the mentioned Secretary-General’s report, which envisaged the establish- ment of a market-based economy, could not in any event have superseded the Security Council Resolution.

Despite several setbacks, economic reconstruction in Kosovo has been described as a success,584 although the private sector has apparently been more successful than the public sector.585 Sustainability however is another issue,586 and needs to be carefully monitored by international actors after withdrawal of the international administration. Kosovo has been and still is very dependent on external funding.587 Kosovo’s uncertain final status surely delayed many decisions in the economic reconstruction process mainly through the inability of Kosovar institutions to access international markets. In addition, the presence of international staff is economically advantageous, but the declining international presence since 2006 has already led to deflation.588

2. ‘Timorising’ the Economy

As was the case in Kosovo, the physical infrastructure and economy of East Timor had suffered severely from underinvestment and damage following the years of occupation and conflict.589 This had resulted in a complete collapse

582 Report of the Secretary-General, UN Doc. S/1999/779, supra note 117, para. 103.

583 SC Res. 1244, UN Doc. S/RES/1244 (1999), para. 17.

584 Demekas, Herderschee and Jacobs, supra note 575, p. 21.

585 Cf. European Commission, ‘Kosovo (under UNSCR 1244) 2006 Progress Report’, Doc. Nr.

SEC (2006) 1386 (8 Nov. 2006), p. 20.

586 Ibid.

587 Dobbins et al., supra note 521, p. 126.

588 European Commission, ‘Kosovo (under UNSCR 1244) 2006 Progress Report’, Doc. Nr. SEC (2006) 1386 (8 Nov. 2006), p. 19.

589 Apart from damage to buildings, the departure of Indonesian militias had led to damage to telephone cables and communication towers, and approximately half of the livestock were

of the public and private sectors and massive unemployment.590 Even without the damage resulting from the conflict, East Timor had always been one of the poorest regions in Asia, with approximately 90 per cent of the population living in rural areas and depending on agriculture.591 As with the judiciary, East Timor lacked competent managers to run the business sector, as the majority of them were Indonesian and had left East Timor.592 Economy did not however enjoy a high priority in the UN mission,593 as other key areas such as security and humanitarian issues had been identified as main concerns.594

The World Bank conducted a ‘needs assessment’ for the reconstruction in East Timor in which it identified several urgent measures to be taken by UNTAET.595 Like UNMIK, UNTAET rapidly established a central fiscal authority,596 a cen- tral payments office597 and a new taxation regime,598 as proposed in the World Bank’s assessment report. UNTAET equally established the US dollar as the official currency of East Timor,599 while permitting unrestricted use of foreign currencies in transactions.600 In order rapidly to rehabilitate small business, the World Bank launched the ‘Small Loans Enterprise Programme’ to grant loans to small companies.601 A ‘Trust Fund for East Timor’ was set up under the Bretton

slaughtered. See Dobbins, et al., supra note 550, p. 157. For an assessment of the pre-ballot economic situation of East Timor see Valdivieso, L. M., Endo T., Mendonỗa, L. V., Tareq, S.

and López-Mejía, A., East Timor: Establishing the Foundations of Sound Macroeconomic Manage- ment (Washington: International Monetary Fund, 2000).

590 Report of the Secretary-General on the United Nations Transitional Administration in East Timor, UN Doc. S/1999/738 (26 July 2000), para. 24.

591 World Bank, ‘Report of the joint assessment mission to East Timor’, Summary (8 December 1999), para. 9.

592 Ibid., para. 11.

593 Harrington, supra note 516.

594 Dahrendorf et al., supra note 496, para. 23.

595 World Bank, ‘Report of the joint assessment mission to East Timor’, Summary (8 December 1999), para. 13.

596 UNTAET Regulation 2000/1 on the establishment of the central fiscal authority of East Timor, UN Doc. UNTAET/REG/2000/1 (14 January 2000).

597 UNTAET Regulation 2000/6 on the establishment of a central payments office of East Timor, UN Doc. UNTAET/REG/2000/6 (22 January 2000).

598 UNTAET Regulation 2000/12 on a provisional tax and customs regime for East Timor, UN Doc. UNTAET/REG/2000/12 (8 March 2000).

599 UNTAET Regulation 2000/7 on the establishment of a legal tender for East Timor, UN Doc.

UNTAET/REG/2000/7 (22 January 2000). Since November 2003, Timor-Leste started to replace the USD with equivalent Timorese coins. See Timor-Leste and Development Partners Meeting, ‘Poverty Reduction and Economic Growth Background Document’ (3–5 December 2003).

600 UNTAET Regulation 2000/2 on the use of currencies in East Timor, UN Doc. UNTAET/

REG/2000/2 (14 January 2000).

601 Report of the Secretary-General, UN Doc. S/2000/738, supra note 493, para. 26.

Woods Institutions and funded several other projects, leading to the reparation of the infrastructure in several areas, such as agriculture, education and port facilities.602 The Trust Fund could however only be used to allocate money to certain projects, whereas the mission was in need of funds to pay the salaries of civil servants. The slowness of payments into the Trust Fund and a strict UN policy of separating costs to support the mission from costs to assist the popula- tion led to many frustrations among UNTAET officials and the Timorese.603

In contrast to the very liberal interpretation of UNMIK’s mandate, UNTAET officials on the contrary did not engage in wide-scale economic reforms. In light of its ‘local capacity building’ or ‘Timorisation’ approach, and because of the already mentioned problem of land registration and ownership which was left to the East Timorese Government, UNTAET decided not to engage in massive privatisation.604 The question of the Timor Gap, which is essential in view of the country’s natural resources, was equally only negotiated by UNTAET. The Treaty was eventually signed by the Timorese Government on the day of East Timor’s independence.605

Although UNTAET managed fairly well to kick-start the economy upon arrival606 and to create a functioning tax administration,607 much of the immediate economic growth was attributed to international presence608 and international donor assistance. Consequently, the departure of UN staff resulted in the sta- bilisation of growth. East Timor remains one of the poorest countries in Asia, with high poverty and unemployment rates.609 Problems equally persist with regard to vague property rights. The sustainability and viability of East Timor’s economy without foreign funding is uncertain and can be guaranteed only by

602 For an overview of international assistance in this area see Parliament of Australia, Senate, Foreign Affairs, Defence and Trade Committee, ‘Final report on the inquiry into East Timor’

(1999–2002), Chapter 2.

603 Chesterman, supra note 104, pp. 194–195.

604 Caplan, supra note 467, p. 150.

605 Timor Sea Treaty between the Government of East Timor and the Government of Australia, 2003 ATS 13 (20 May 2002).

606 Dobbins et al., supra note 550, p. 175 and da Costa, H. and Soesastro, H., ‘Building East Timor’s Economy’, in Soesastro, H. and Subianto, L. H. (eds.), Peace Building and State Build- ing in East Timor ( Jakarta: Centre for Strategic and International Studies, 2001), p. 16.

607 Valdevieso, L. M. and Lopez-Mejia, A., ‘East Timor: Macroeconomic Management on the Road to Independence’, 38 Finance and Development – An IMF Quarterly Magazine (2001).

608 da Costa, H. and Soesastro, H., ‘Building East Timor’s Economy’, in Soesastro and Subianto, supra note 606, p. 11 and Valdevieso and Lopez-Mejia, supra note 607.

609 Report of the Secretary-General, UN Doc. S/2007/134, supra note 490, para. 48.

an effective economic strategy with regard to East Timor’s natural resources.610 This was however, not addressed by UNTAET.