Policy Pulse - 6 May 2019 - George Anjaparidze
Key policy messages:
Normalization of relations between Belgrade and Pristina will facilitate the inflow of much needed Foreign Direct Investment (FDI)
Kosovo has an unsustainable economic model and desperately needs FDI to support export-oriented growth and improve competitiveness
Serbia stands to benefit by reducing uncertainty for its path to EU accession, which will unlock additional FDI inflows
The Macron-Merkel summit in Berlin on 29 April did not deliver a breakthrough in normalization of relations between Belgrade and Pristina. However, this style of “Summit diplomacy” may prove to be effective if it is choreographed with on the ground dialogue and negotiations.
The challenge at hand is to restart structured dialogue between Belgrade and Pristina despite a deteriorating political situation on the ground. A crucial component of any future dialogue needs to include a focus on economic issues (see our brief on the role of economics in conflict resolution).
Kosovo needs FDI to put the economy on a sustainable growth path. The current economic model is flawed. Growth is largely driven by an increase in consumption fueled by remittances. An uncompetitive production base in Kosovo has meant that the increase in consumption demand has mainly been met by imports.
Kosovo lags behind in securing FDI flows (see Chart). Furthermore, the FDI flows that materialize from diaspora are targeted at non-tradable and low-productivity sectors. Kosovo desperately needs FDI to support export-oriented growth and improve competitiveness. Major privatization deals have been held back in the tourism, extractive minerals and infrastructure sectors because of the persistent political uncertainty in relations between Belgrade and Pristina. The perpetuation of the status quo robs Kosovars the opportunity to create a sustainable livelihood in Kosovo.
More broadly in Serbia, FDI flows have fared better as business environment reforms have had a favorable impact. Although, Serbia still lags behind some regional peers (see Chart). The bigger opportunity for Serbia comes from the prospects of EU membership. The EU strategy for Western Balkans targets 2025 as the accession year for Serbia. As part of this process, Serbia needs to bring its national legislation in line with the EU and normalize relations between Pristina and Belgrade. If it succeeds, the gains will be significant only one of which is FDI.
In the three years leading up to accession neighboring Bulgaria and Romania experienced average annual FDI inflows of 16.2% and 8% of GDP. Normalization of relations between Belgrade and Pristina, would signal to investors that the most contentious issue on Serbia`s path to EU accession has been overcome. The reduced uncertainty will unlock additional FDI inflows to Serbia. It can help secure better outcomes in privatization of state-owned enterprises, infrastructure assets and spawn productive private sector led growth.
As the Macron-Merkel Summit demonstrated, normalizing relations between Belgrade and Pristina will not be easy. It will require crafty diplomacy, political maneuvering as well as robust economic analysis to help policy makers understand the cost of inaction.
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