[NOTE: Below is a Google translate version, edited and corrected by myself, of my original Albanian posting on the components of economic growth and rentier capitalism in Kosovo. It is not the best translation, and it is probably not the way I would have written this in English, but I still think it may be useful especially given the gaping lack of political economy analyses of Kosovo.]
We often hear statements in Prishtina that, in recent years, Kosovo has had the largest amount of economic growth in the Balkans. This is correct, as long as regional economies are affected (in different degrees), originally from the financial crisis of 2008, and then from the eurozone crisis that has hit especially some of the main trading partners and investors in the region, like Greece and Italy. While Croatia and Serbia have experienced recessions, Macedonia and Albania minuscule growth, for 2012 Kosovo is expected to register growth of 3.9% of Gross Domestic Product (GDP).
However, it should not be forgotten that the level of economic growth in Kosovo is close to the range of 2-4%, which has been registered for all transitional economies in 2012, according to estimates by the European Bank for Reconstruction and Development (EBRD). Seen from his perspective, the case of Kosovo is hardly one of a deviation from the norm. Moreover, judging by the EBRD estimates (and some of my own analyses for the Balkan region), economic contractions since 2008 in the periphery of Europe (or what Will Bartlett calls Europe’s ‘super-periphery’) have a direct relationship with the degree of exposure of these states to eurozone economies. Economic downturns, almost as a rule, have been more severe in states with strong ties to the eurozone, both in terms of trade and in financial flows. Since 2008, Kosovo has been spared the worst of the crisis due to the low level of interdependence of its economy with that of the euro area and the EU in general. For example, Croatia, which exports heavily to the EU, has been hit harder by the European crisis, in relative terms, than Kosovo, which exports very little, because Croatia has markets in the EU, while Kosovo does not.
However, this analysis has less to do with where Kosovo fits in regional comparisons, and more with the components of economic growth in Kosovo over the past years (until 2011, since data for 2012 are not yet fully available). In a way, this analysis reveals the sources of economic growth by analyzing its constituent components. At the same time, it highlights the volatility of the current path of economic development in Kosovo, despite nominal or real growth in GDP.
Let us start with absolute terms. Kosovo GDP has increased from 1.9 billion euro in 2001 to about 4.9 billion euros at the end of 2011. Economic growth in terms of GDP has been steady over the years after the 1999 war. The trend of growth has continued after the declaration of independence in 2008 and survived the 2008 financial crisis and deep economic problems in Europe and the following years.
What we are interested in is breaking down GDP into its constituent components. A visual representation of this is given below, including all components of GDP before subtracting imports (which is part of the formula for the calculation of GDP).
Graph 1. GDP components in Kosovo, 2004-2011, before subtracting imports.
As is evident, in absolute terms, household consumption (Household Consumption Expenditure) makes up the largest share of GDP. Capital formation (gross capital formation, which includes private and public investments, such as infrastructure) are the second component, the third are exports, while government spending (government, Final Consumption Expenditure) fourth. The last element is donor expenditure (in this case, the salaries of employees of international organizations) make up an increasingly smaller share of GDP.
Graph 2. Participation of GDP components by percentage.
Another picture is presented to us if we look at each component based on their actual share in GDP. From this we see the largest relative increase in the role of capital investments and exports against household consumption as the bearers of economic growth (Graph 2).
From these two views we seem to have good progress in economic growth, given increased investments and exports. However, as is well known, one of the main problems of Kosovo’s economy is a large trade deficit. Continued rise in imports eats away at any nominal economic growth, because part of the surplus created in the economy is sent abroad. This is simplistic from an economic perspective, but in purely arithmetical terms, this is why Kosovo, rather having a GDP of around 7.3 billion euro in 2011, had only 4.9 billion. This part is “lost” by the country’s economy through the purchase of foreign goods. The graph below illustrates how, despite modest growth in exports, imports are growing faster, and therefore the trade deficit from 2004 to 2011 almost doubled to nearly -1.8 billion euro.
Graph 3. The trade deficit (exports – imports) of Kosovo, 2004-2011.
The role of government expenditure on economic growth is often highlighted by observers Kosovar economy. However, beyond superficial impressions, for a proper analysis those which are most important are trends. These are reflected in the graph below.
Graph 4. Annual growth (in percent) of household consumption (blue), investments (green) and government spending (red). Thin lines show the underlying trends for each.
It is thus clear that the growth of specific components of GDP since 2004 are not equal. Household consumption, for example, during the 2008-09 global financial crisis, has fallen from 16% to -2% (and Kosovo was not affected by the crisis!), while investment growth fell from 26% to 9%. But the trend lines enable us to distinguish long-term trends from annual fluctuations. It is clear that while the trend of growth in household expenditures is rather flat on average, government spending has been at an increasingly growing rate. Investments are also growing, but even here, one can easily assume that these include government capital investments, and especially after 2010 construction of the Morin-Merdare highway. This makes us conclude that investment and government expenditures are more or less the main driver of economic growth, since growth is not translated into greater increase consumer level, which means that on average, households Kosovo are not getting any richer, since annual consumption rates, on average, are not growing dramatically, and even falling.
The figures clearly show the difference between the rate of growth of household consumption and government expenditure as a share of GDP. As can be seen a clear line before and after 2008.Prior to 2008, the growth of household consumption expenditure was in the range of 6-16%, and after 2008, this range drops to -2-10%. The opposite is true for government spending since 2007 (when the first Thaçi government came to power), increased by 10-17% per year. If one is looking for an explanation for economic growth in Kosovo after 2008, this is it.
There are clear indications in the data that economic growth is not being translated into an improved household economic situation in Kosovo. We currently do not have solid data on incomes in Kosovo. However, we can draw some indications from the data which we do possess. As it is known, the period after 2007 marks a period of enormous growth in inflation (see graph below). Kosovar households (on average) are not only not becoming richer, but have struggled to survive the overall rise in the cost of living. The logic is this: if we household income in Kosovo was increasing as a result of economic growth, consumption will grow in spite of inflation. Prices rise, but since rises in income are greater, families can consume what they consumed last year, as well as add to their consumption even more. However, what we see is that after 2008, the increases and decreases of household expenditures are dictated almost entirely by inflation. This is illustrated in the almost perfect synchronization that exists between the rate of growth of household consumption expenditures and inflation in graph 5 below. As is clear, after 2007, household spending increases are more or less equal to the inflation rate, which means that the difference between necessary expenses and added consumption (consumption beyond basic needs), for many families is only being reduced. Before 2007, while inflation growth was small, or there was even deflation (falling prices), the household consumption rose about 5% per year, indicating the rising wealth of Kosovar households that are able to spend more than the year before. However, after 2008, the growth in consumption levels are very close to the inflation rate, which indicates that Kosovar families are forced to spend more just to maintain their current standard of living. Put bluntly: the average family in Kosovo has not benefited from economic growth at all in Kosovo since 2008.
Graph 5. (Above) Inflation in Kosovo since 2002 and (below) consumer spending growth rate of households (blue) and increased inflation rate (red). Since 2007, Kosovar households are not spending more because they are getting richer, but in order to cope with inflation.
There is another interesting element that indicates how the financing needs of households are being met in times of rapidly rising prices. It seems that there is a direct correlation between the growth of household consumption and increases in the level of private sector debt (see graph 6 below). In other words, to maintain the level of expenditures (i.e., to cope with cost of living increases), Kosovar households are assuming ever greater debt. Given that the interest rates charged by Kosovo bank are preposterous, increasing the debt burden of Kosovar households will have long-term consequences, especially if the investments made by households (e.g., in real estate) are not sustainable.
Graph 6. The growth of household consumption in GDP (above), the increase in imports (middle) and the growth of private sector debt (below).
Graph 7. The annual growth of household consumption (blue) and private sector debt (green).
The above chart (7) illustrates the close connection between the growth of household expenditures and private sector debt in the Kosovo economy. This graph, which shows the annual growth of these two indicators, we observe a strong synchronization between the two, but where the rate of growth of private debt is higher than the growth in the rate of consumption. Of course, if we had the data of 2012, we would have a more complete picture. While I hope to complete the analysis when this data is made available, the trends remind us that there will be no dramatic changes.
What does this mean? Obviously, this is a very limited analysis to produce solid conclusions. However, the data presented here suggest two preliminary conclusions. The first is that the growth of GDP in Kosovo is mainly a result of increased government spending and investment (especially in infrastructure), rather than consumption growth (which would imply an increase in income). This trend was even threatened by the 2008 crisis. Since then, Kosovo households on average spend more not because they are getting richer, but because they have to cope with enormously rising costs of living.
The second is that consumption growth is increasingly dependent on credit, which means that a part of the economic growth is being financed by the private sector’s growing debt. At the same time, the exponential growth of the trade deficit shows that industrial development of the kind that would result larger exports and import substitution is not occurring in the sufficient degree to prevent the rise in imports.
What does this mean in terms of an analysis of political economy, which demands a concomitant analysis of social and class relations that constitute the economic structure? One may risk a hypothesis, which I believe is sufficiently reasonable: that the biggest beneficiaries of economic growth in Kosovo (as always, in relative terms) is not the average family in Kosovo, but importers (as a result of a growing market for imported goods), government contractors (as a result of increased government investment expenditure), and banks (due to increased debt). We thus have three class factions that dominate the Kosovar economy: compradors, political capitalists (businessmen mainly associated with the ruling party, who benefit from government contracts), and organized financial capital (Kosovo’s foreign-owned banks). A shared feature of these three socio-economic factions is rentierism. In economic terms, rent, in contrast with profit, is realized through “unproductive” activities in the economic sense of the word. The point is that, in economic terms, although importers, government contractors and banks, as commercial organizations, make a “profit”, their “profit” results not from the risks undertaken by investments in productive capital, but through the control and monopoly of certain resources – flow of foreign goods (compradors), control of money (banks) and privileged political ties (political capitalists). Although rentierism is present in all capitalist economies, in Kosovo rentier capitalism is the dominant form of capital accumulation, since the rentier sectors are the largest growing and most “profitable” sectors in the Kosovo economy.
The question is, how sustainable is this course, in purely economic terms? (We are ignoring, of course, the political implications of this economic structure.) The first factor is that, without a real expansion of Kosovo’s industrial base, government investment, especially the kind privileged by the Thaçi government (investment in road infrastructure) will represent an increasingly large burden and is fiscally unsustainable in the long run. Kosovo’s financial capacities are very low (on this see this and this article) and its existing financial system cannot support the kinds of deficits required to maintain the current rate of growth in spending. Meanwhile, an extremely poor export base shows that the positioning of Kosovo in the regional, European and world economy shows no signs of improvement. The second is that, relying on remittances, the standard source of support for the consumption of many households, cannot continue indefinitely. If Kosovo follows the trends of other countries in the region, after a certain period, remittances will fall, regardless of economic developments, as a result of demographic trends. The third is that investment in Kosovo is directed mainly in construction and trade, which indicates that over the last decade there has been little change in the structure of private sector investments in Kosovo. This also means that credit growth, which has already fallen since 2008, could be reduced even further, especially if there is a rise in bad loans, which may result in further increases in interest rates. All these indicate the need for a radical change of the economic course, but which necessarily must be preceded by a rupturing of the political alliances (explicit or implicit) of the class fractions that dominate and benefit from the structure of rentier capitalism in Kosovo. Let this be my immodest wish for 2013.