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NERP or Six numbers to understand Kosovo

NERP
NERP, not NERD

“NERP” sounds like “NERD”: may this contrast – or this photo – help you remember this particular acronym. NERP stands for National Economic Reform Programme. Last year the European Commission asked all Western Balkan governments to produce one NERP a year. (Proposed on page 8 here). The 2015 Kosovo NERP report is in fact different from the nerdish, impenetrable language of many economic analyses published on the Balkans in recent years. It deserves to be read widely.

The 2015 Kosovo NERP is 129 pages.  Probably few people intend to read it in full. This would be a pity, as it provides a good foundation for a serious debate. In fact, the report hides its radical implications with its  first sentence:

“Kosovo has been one of the very few countries in Europe and the region of South Eastern Europe that had positive growth rates in every single year in the period since the 2008 outbreak of the global financial crisis.”

This is not wrong, but it is misleading, as the analysis itself quickly makes clear. While everyone  knows that Kosovo is poor, exports little, attracts little foreign investment and creates few jobs the NERP tell a far more disturbing story.

Kosovo’s problem in six figures

The 2015 Kosovo NERP contains many numbers, but some that are particularly telling. Between them, these six numbers tell you (almost) everything you need to know about Kosovo’s economy.

(1)   EXPORTS

            305 million Euros – the total value of goods Kosovo exported in 2013

An annual export number of 305 million Euro is abysmally low. For comparison: Estonia exported goods worth 12.3 billion Euros in 2013. Estonia has a much smaller population than Kosovo.[1] It is also worrying that in 2013 two thirds of these exports were “base metal and mineral products.” This means there are barely 100 million Euro of other exports (food, vegetables, plastics) that produce added value. Kosovo extracts minerals from the earth and sells them – but it produces very little.

(2)   IMPORTS

            2.3 billion Euros – the total value of goods Kosovo imported in 2013

This is very high compared to Kosovo’s exports. So how is the gap financed? How do Kosovo importers obtain these 2.3 billion Euros to import goods? One must assume that they obtain much of this from Kosovars who earn this money abroad.

(3)   REVENUES

The level of imports is directly linked to the third number:

1.3 billion Euros – total revenues (income) of the Kosovo government in 2013. No less than 871 million of this comes from border taxes on imports

This means that the state – 70 percent of its total revenues – depend on imports taxed at the border (customs, excises, and VAT on imported goods).

To maintain the current level of public spending, imports need to remain at least as high as they are now. If less money is transferred to Kosovo by Kosovars abroad, for whatever reason, government revenues will contract quickly. Even if government revenues and spending are in balance (with a low government deficit), and even if the debt of Kosovo’s government is relatively low as a share of GDP, the structure of public finances is very fragile.

(4)   EMPLOYMENT

The fact that Kosovo produces few goods, which people outside of Kosovo (low exports) or inside Kosovo want to buy translates into tragically low numbers of jobs. Here is the fourth number:

220,000 people – registered as employed in 2013

There is sometimes confusion in public debates about “employment.” They frequently get mixed up with debates on the distinction between the official and unofficial (grey) economy. In fact it is simple: there are two ways to measure how many people work, which always give different results as the meaning of “employed” is different in each case.

The first way is to look at registered jobs. These are jobs which are known to public authorities and which are taxed. The second way is to do a representative survey of the labour force, based on samples. In the Kosovo Labour Force Survey (LFS), or any other such survey elsewhere, this is how “employment” is defined:

“People aged 15-64 years who during the reference week performed some work for wage or salary, or profit or family gain, in cash or in kind or were temporarily absent from their jobs.” (LFS 2013, page 7)

This includes anyone in the family of that age who works “for family gain” on their small plot of land, milks the cow, looks after vegetables during the reference week, even if nothing is then sold for cash. In a country with a lot of subsistence farming this number is always much higher than registered employment. In Kosovo in 2013 this number was 338,000 people.

These two figures of employment allow us to estimate the size of the Kosovo private sector. There are 77,000 jobs in the public sector (paid by the state). This leaves 143,000 jobs in the registered private sector. Then there are another 118,000 people “employed” (LFS) without being registered.

Even added together, this number is shockingly low. Kosovo’s resident population of 1.8 million people divides into some 297,000 households (the average household has 6 members, still the largest households in Europe today). Even including all employment (per LFS definition), and all subsistence family farming on tiny plots, this yields barely one “employed” per household.

No wonder only slightly more than one in ten women of working age in Kosovo are “employed” (even by the LFS definition). No wonder Kosovo households have few savings: every employed person has to support five other people (dependents).

(5)   FOREIGN DIRECT INVESTMENT

All of this raises the key development question: will Kosovo businesses – existing or new ones – develop more competitive products for new markets in the coming years?

Gaining market share in export markets requires competing successfully against businesses from other countries, from the EU, the Balkans, Turkey. This requires investment, such as new machinery. New or expanding businesses in Kosovo can be either foreign (through FDI) or domestic.

Here is the fifth number:

241 million Euros – Foreign Direct Investment (FDI) in 2014

This is very low by any standards: it means that very few foreign companies show any interest in using Kosovo as a base for their production and transfer their machinery and know-how here.[2] And, as the NERP notes, FDI has been decreasing in recent years:

“Since 2007, net FDI inflows have been volatile and with an overall negative trend … the sectorial composition of FDI has shifted towards real estate and construction between 2009 and 2013.”

What the NERP does not give us is the value of all cumulative FDI (the FDI stock) in Kosovo. For comparison: in Estonia in 2014 this FDI stock is around 15.9 billion Euro. Kosovo’s total GDP is only 5.3 billion Euro.

(6)   COST OF CREDIT

The sixth number tells us what opportunities existing Kosovo entrepreneurs have if they want to develop:

10 percent – the annual interest rate on loans in November 2014 (in November 2013 it was 12 percent)

This is very high. Again, look at Estonia (European Central Bank data): loans to non-financial corporations – depending on specific conditions – carry around 3 percent annual interest at the end of 2014.

What do these six numbers tell us about the Kosovo economy?

  • Export of goods is very low; given current trends of declining FDI and high costs of borrowing for businesses in Kosovo this is unlikely to change anytime soon. The NERP projects a best case scenario in which the export of goods increases from 305 million Euro to 441 million Euro by 2017.
  • There is little structural change in the Kosovo economy compared to one decade ago. The GDP growth that has happened has been the result of households spending money (consumption) based on transfers from abroad and increases in public sector salaries (funded largely through border taxes on imports of goods, which are bought largely with money transferred from abroad).
  • The employment rate will remain very low in the foreseeable future. If new jobs are created in the next years in the private sector one might expect some subsistence farmers to turn away from non-cash production to other – regular – employment. In order to really increase employment rates and create new jobs Kosovo would need levels of investment and export growth that are simply not on the horizon for many years to come.
  • This makes public policy in many areas hard to formulate. Take the issue of skills needed for the labour market. What jobs does today’s generation of young Kosovars need to be prepared to take? What skills will they need? Unless there is a realistic job of more jobs in the foreseeable future this question is impossible to answer.

All of this is well set out in the NERP. At the same time it also underlines the main gap in the NERP analysis: the absence of any analysis of the economic impact of current and future migration flows.

While the word remittances appears many times, “migration” does not appear anywhere in the text. At the same time everything described in the NERP – the huge trade deficit, a public sector funded to 70 percent by border taxes, recent GDP growth – is the direct consequence of the migration that took place many years ago. There is no discussion of what policies – education, social and foreign policy – might make regular migration from Kosovo to the EU possible. This created the lifeline of remittances that keeps Kosovo households – and the public sector – afloat today. This is the lifeline that the EU has tried to cut since 1999, making it increasingly difficult for Kosovars to migrate to work.

This is a dangerous omission. But it is not surprising. In the current Kosovo government programme “migration” is discussed only under the heading “diaspora”, as a foreign, not an economic development issue.

“Promotion of Kosovo Diaspora and realization of objectives arising from Strategy on Diaspora and Migration 2013-2018, which is related to the preservation of national and cultural identity of Diaspora, to creation of conditions for the participation of Diaspora in the political and social life and their representation in decision-making institutions of the country, integrating them in countries where they live, as well as involvement of Diaspora in socioeconomic development of the country.“

Kosovo Government Programme 2015-2018

This half sentence is not followed by any concrete policy measure.

The pressure on Kosovars to look (legally or illegally) for work and income elsewhere will grow ever stronger in coming years. How strong this pressure is already has recently become obvious to policy makers in the EU and in Kosovo.

ESI argues that the European Union, instead of simply opposing this pressure, should try to channel it in mutually beneficial ways. Illegal and irregular migration needs to be stopped, but opportunities for regular, or circular work migration need to be opened. This will also require a major effort on the part of Kosovo authorities in many policy fields, starting in education policy.

The first paragraph of the NERP euphemistically refers to “the country’s rather specific development model.” What is today specific about this model is that it is not about development in Kosovo at all. As the NERP notes, Kosovo experienced growth:

“… based on strong remittances and FDI inflows from diaspora that boost domestic demand through household consumption and investments channelled primarily into the non-tradable sector, such as real estate and services.”

This is growth dependent on wage earners in Germany, Switzerland or Austria with links to family members resident in Kosovo. The NERP refers to some risks:

“The existing growth model of the country based on large financial inflows is associated with significant risks. On the short run, the main risk factor would be a sudden fall of these inflows – caused by unfavourable economic developments in countries with the largest Kosovo diaspora – and its negative consequences for growth, public finances, and external and financial sector stability.”

But then it falls silent. It does not discuss the role of EU policies that try to prevent further migration.

Young Europeans – but not part of Europe today
Young Europeans – but not part of Europe today

The NERP is an interesting document. More will be said on this blog later on its recommendations to increase exports. But the main value of the NERP lies in showing what many prefer to forget: while migration alone is no development policy, without migration Kosovo has no medium term economic future. Simply put:

The Kosovo “growth model”

Workers abroad, with family in Kosovo  SEND Money that fuels local consumption. This funds imports. Taxation of these imports is the core of public revenues

EU member state policy

STOP Kosovars moving abroad to work illegally
CLOSE most possibilities to move to work abroad legally

Greatest risk to Kosovo “growth model”

Current EU member state policy succeeding.

In order to develop a credible migration policy, the vital importance of migration needs to be acknowledged first, including in the NERP. It is never too late.

Looking for workers with specific skills: www.make-it-in-germany.com
Looking for workers with specific skills: www.make-it-in-germany.com

Further reading:

 

[1]  Estonia: 1.3 million. Kosovo 1.8 million.

[2] The definition of FDI according to the World Bank: “Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor.”

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On Writing – Gibberish and Economics

They are the two most memorable words for texts that are best forgotten: Gibberish and Gobbledygook.

“Gibberish or gobbledygook refer to speech or other use of language that is nonsense, or that appears to be nonsense. It may include speech sounds that are not actual words, or forms such as language games or highly specialized jargon that seems nonsensical to outsiders.” (Wikipedia)

As Glenn Seaborg explained one theory in 1980 in “Our heritage of the elements”:

“… gibberish comes from the name of the famous 8th-century Islamic alchemist Jābir ibn Hayyān, whose name was Latinized as “Geber”, thus the term “gibberish” arose as a reference to the incomprehensible technical jargon often used by Jabir and other alchemists who followed.”

Jabir ibn Hayyan alias Geber
Jabir ibn Hayyan alias Geber

There is no particular reason why texts about economic development should be either gibberish or gobbledygook. And yet, quite a lot of what was written by the European Commission on the economic development in the Balkans in recent years might qualify.

Take a look at the “EU Candidate & Potential Candidate Countries’ Economic Quarterly” published regularly by the Directorate-General for Economic and Financial Affairs (ECFIN) of the European Commission.

The report in late 2014 described trends in the “real sector” of Bosnia and Herzegovina as follows:

“The economic upturn throughout 2013 and the first quarter of 2014 came abruptly to a halt in the second quarter of 2014 mainly as a result of the heavy spring floods. Accordingly, GDP growth slipped into a negative territory by 0.5% y-o-y after expanding by 3.2% in the previous quarter. Going further, preliminary data for the third quarter released by the statistical agency indicate GDP growth to have marginally turned positive (0.6% y-o-y). Similarly, high-frequency indicators for July-October 2014 point towards a modest revival of economic activity with the country-wide industrial production up by 1% yo-y, before turning negative again in November. In particular, the mining and quarrying sector as well as the utility sector registered the largest output contraction y-o-y, -1% and 10.7%, respectively, while the manufacturing sector posted the largest output increase (4.4%). The slump of domestic demand in the second quarter of 2014 started to reverse in July September with the growth of retail sales speeding up by 2.1% y-o-y and even accelerate in October-November to 7.8% y-o-y, well above the expansion of 4.6% in 2013.”

Already at first glance this breaks the basic rule of writing well: the writer is making the reader work too hard.

At second glance, once one begins to analyse this paragraph, it turns out that its meaning is elusive … or, in plain language, this makes little sense. Read this once, twice, three times, and then ask yourself: what has been happening in the Bosnian real sector in 2014, compared to 2013? There was a flood, and the economy suffered: but what do all these quarterly variations add up to? (Note that this paragraph is all the quarterly report tells the reader about the Bosnian real sector in late 2014.)

 

Or take this analysis of “monetary developments in Kosovo” in early 2015:

“Consumer prices started declining in December 2014 (-0.5% y/y) and continued on a downward trajectory by February (-0.2% y/y). The decline in the price index was almost completely influenced by decreasing prices of transport and education. On the other hand, 65.7% of the CPI components have actually been increasing; most notably food 2.1% y/y, energy 7.4% y/y etc.”

The reader understands that 65.7 percent of the prices of the components of the Consumer Price Index (CPI) have increased (one assumes in February), and (one assumes) 34.3 percent of the prices have not. One learns that there have been (monthly) decreases in the “prices of education” in January and February 2015, though what that means is elusive. There is no explanation which costs of education are included in the Consumer Price Index. Or why any of this matters and to whom. And what the etc. at the end refers to.

The economic sections of progress reports, which the European Commission publishes every autumn to evaluate accession countries, have also been written by ECFIN. The following paragraph is from the 2013 annual report on Macedonia. It invites readers to meditate on the meaning of words and numbers:

“Fiscal discipline was relaxed in 2012, and the quality of public spending deteriorated further. The general government budget deficit reached 3.8%, thus overshooting even the revised deficit target, which the authorities had raised by 1 percentage point to 3.5% in autumn. Another budget rebalancing reduced mainly investment spending, due to severe revenue shortfalls. Total expenditure as share of GDP rose from 31% in 2011 to 34% in 2012, and is estimated to reach 35% in 2013. The primary government budget deficit rose to 3.1% of GDP in 2012, compared to 1.7% in 2011. Capital spending was almost unchanged in 2012 compared to 2011, at 12% of total expenditure, or just over 4% of GDP, projected to decline to 11.3% of total expenditure in 2013, or 3.9% of GDP. The share of social transfers in total expenditure declined slightly in 2012, to 44.7% from 45.2% a year earlier, and is projected to stay largely unchanged in 2013. As a share of GDP, social transfers increased somewhat, to 15% of GDP, up by 0.4 percentage points.”

This creates an illusion of meaning. The reader is offered fourteen facts:

General government deficit target (2012)
Revised general government deficit target (2012)
Actual general government deficit (2012)   		 2.5 per cent
3.5 percent
3.8 percent
Total expenditure as share of GDP (2011)
Total expenditure as share of GDP (2012)
Total expenditure as share of GDP (2013 expected)  		 31 percent
34 percent
35 percent
Primary government budget deficit (2011)
Primary government budget deficit (2012)   		 1.7 percent
3.1 percent
Capital spending as share of total spending (2011)
Capital spending as share of total spending (2012)
Capital spending as share of total spending (2013)		 12 percent
12 percent (4 percent of GDP)
11.3 percent (3.9 percent of GDP)
Social transfers in total expenditure (2011)
Social transfers in total expenditure (2012)
Social transfers in total expenditure (2013 projected)		 45.2 percent (14.6 percent GDP)
44.7 percent (15 percent GDP)
44.7 percent

What does all of this mean? The reader learns that

  • Fiscal discipline was relaxed and that “the general government deficit grew more than expected”; (two ways to say the same thing)
  • The reason for this: a severe revenue shortfall.
  • In response to this shortfall the government REDUCED investment spending but “capital spending was unchanged.”
  • Meanwhile total government expenditure ROSE.
  • And the share of social transfers in expenditure DECLINED.

So what actually happened in Macedonia?

The government did not collect as many revenues as it had planned. It then reduced investment spending. Social transfers declined as a share of expenditure. Total government expenditure rose. What type of spending increase explains the remarkable increase (by 3 per cent of total GDP!) in government spending? On this, there is nothing. We learn that the “quality of public spending deteriorated further,” a point that is never explained.

 

The truth about markets Money
Lucid writing on economics

During such meetings I also quoted positive examples of good writing. Oxford professor and FT columnist John Kay on markets. My friend Felix Martin on money. The Dutch Central Bank, describing the “faltering Dutch economy” in its 2012 annual report (page 15). You do not need a PhD in economics to understand the annual reports by the European Central Bank either:

“The economic and financial crisis has reduced euro area potential output via two main channels: lower investment and higher structural unemployment.

First, during the most severe phase of the crisis, investment rates declined considerably, with financing conditions, such as terms and availability of credit, worsening in particular. Increased economic and political uncertainty and an unfavourable economic outlook made it more difficult to assess investment projects and lowered the expected rate of return on investments. High indebtedness of non-financial corporations in some euro area countries also made deleveraging necessary, further reducing credit demand.

Second, the crisis has also led to an increase in short to medium-term structural unemployment rates, indicated by the rise in long-term unemployment and an increase in skill mismatches. The unemployment rate of low-skilled workers has increased more than that of high-skilled workers, largely because the crisis triggered a sectoral relocation in many euro area economies, in particular a shift away from the construction sector. As it may be difficult for low-skilled workers dismissed from one sector to find jobs in other sectors, and as their human capital progressively erodes with the duration of unemployment, structural unemployment rates may remain elevated for an extended period.”

(ECB, 2014 Annual Report, page 23).

Fortunately, during 2014 awareness of the problem posed by unclear writing on economic trends has increased in many EU policy circles. There is good reason to expect that future writing by the European Commission (and ECFIN) on the economies of accession countries will be less impenetrable. (It may also be worth considering a thorough reform – or even a discontinuation – of these quarterly reports: http://ec.europa.eu/economy_finance/db_indicators/cpaceq/index_en.htm)

PS: To add one useful example when it comes to writing about economic trends in the Balkans – certainly for the economic section in the next Kosovo progress report of the European Commission – look here: 2015 Kosovo NERP.

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On Writing – The fourteen-year-old test

Every organisation that is around for long enough develops its own jargon. One question that we in ESI ask ourselves often is whether a given draft “can be understood by a perceptive fourteen-year-old.” Does it meet the fourteen-year-old test?

The logic behind this is simple: whether we write about the Bosnian constitution, rural poverty, election monitoring, the furniture business in Turkey or the European statistical system, we try to communicate with people from many countries with different backgrounds. We imagine a group of readers consisting of a Bosnian minister, a Turkish journalist, an Italian diplomat and an American NGO activist. We assume that our readers are experts in their fields, experienced and pressed for time. We do, however, assume that they are as impatient with bad writing as we are.

A literate and curious fourteen-year-old already knows a lot about the world and is eager to learn more every day. What she is not yet familiar with is the jargon in any field. She is also likely to ask what a certain concept actually means when it is first encountered, whether “human capital”, “free and fair elections”, a “functioning market economy” or “annual GDP growth.” Or what the purpose of any text or discipline is.

Marc Bloch
Marc Bloch – great writer

In his book The Historian’s Craft Marc Bloch, one of the greatest historians of the twentieth century, put himself in the position of a father asked by his child: “What is the use of history?” And then he sets out to answer this simple but certainly not childish question in a book written while he was already part of the French resistance in 1942. (He was later arrested and shot by the Gestapo).

When the stakes are real, there is no time for any but important questions to be addressed. And to always aim, even if one falls short, for the elegance and simplicity of masters like Bloch.

To write in “Fourteenish” is thus to write for a broad audience of concerned readers; eager to learn but impatient; for readers interested in a wide variety of issues on which they cannot always be experts; for readers who always ask: “What is the point?”

As William Zinsser put it in his classic On Writing Well – required reading for anybody drafting policy papers – “writers must therefore constantly ask: what am I trying to say?” And writers must remember:

“In terms of craft, there’s no excuse for losing readers through sloppy workmanship. If they doze off in the middle of your article, because you have been careless about a technical detail, the fault is yours.”

One of the ambitions of this blog is to begin to “translate” policy papers on different issues, in particular texts on economic development and EU policy, into Fourteenish.

We begin this series of with Reflections on (not) writing well on economies; followed by a look at a thought-provoking and lucid policy paper, the 2015 Kosovo NERP (National Economic Reform Programme).

PS: If you come across any text – a policy paper or an academic report – which you believe deserves to be held up as an example of a particularly badly or well written text, please send it to g.knaus@esiweb.org.