Kosovo is a province of Serbia in the Federal Republic of Yugoslavia. Following the end of the Kosovo war of March-June 1999, United Nations Security Council Resolution 1244 (UNSCR 1244) of June 10, 1999 placed Kosovo under temporary UN administration. While reaffirming the sovereignty of the Federal Republic of Yugoslavia over the territory of Kosovo, UNSCR 1244 authorized the UN Secretary-General to establish an interim administration that would provide “substantial autonomy and self-government” to the people of Kosovo.
The immediate priorities of the international community after the end of the Kosovo conflict were to establish order and security and avert a humanitarian catastrophe. Despite the short duration of armed conflict between NATO and Yugoslav forces, which lasted 78 days, the Kosovo conflict caused significant human dislocation. At the peak of the conflict, nearly one million Kosovars—mainly ethnic Albanians—representing about 45 percent of the prewar population of the province fled their homes. Following the end of the conflict, some 210,000 Serbs and other non-Albanian minorities were displaced and remain so to this day. The conflict also caused extensive damage to property, especially to the housing stock and public infrastructure. After the end of the war, the NATO-led Kosovo Force (KFOR) and UNMIK inherited a precarious domestic security situation: widespread possession of arms, human rights abuses, violence, and the risk of generalized conflict between armed Albanian groups. KFOR and UNMIK’s first major tasks were thus to establish a secure environment and provide emergency assistance to the population. During the first four months after the conflict, relief agencies distributed food rations to about 1.5 million people in Kosovo, and some 900,000 people—about half of the population—continued to receive food aid throughout the winter of 1999-2000. Construction materials were provided for home reconstruction, and emergency repairs were carried out on health facilities and on the road, energy, and water supply networks. The handling of the immediate postconflict crisis by the international community was asuccess: by the early summer of 2000, the humanitarian emergency was over.2
The productive capacity of Kosovo had been severely degraded during the 1980s and 1990s. Like the rest of Serbia, the province had suffered from the breakup of the former Socialist Federal Republic of Yugoslavia and the associated conflicts, as well as the economic mismanagement of the Federal Republic of Yugoslavia during the 1980s and 1990s (Table 1). Especially after 1989, when the autonomy of Kosovo within the Republic of Serbia was suspended, the province experienced massive disinvestment. Operations and maintenance in industry and infrastructure were neglected. As a result, estimates based on official data suggest that industry collapsed and real output contracted in the early 1990s.
Despite the signs of vigorous private economic activity, Kosovo’s long-term economic prospects are clouded by considerable uncertainty-Revitalizing the province’s infrastructure and capital base after years of degradation and wartime damage would require significant up-front investments. One of Kosovo’s greatest assets, its young population, 7 would also require sizable investments in education to realize its full potential- Donor assistance has been critical in averting a humanitarian tragedy and getting Kosovo’s economy back on its feet, but it cannot be relied upon fully to finance these necessary long-term investments. At the same time, domestic and especially foreign private investors are unlikely to undertake major projects in Kosovo as long as uncertainty about the province’s final status persists.
Kosovo is a successful case study in economic institution building. The province’s economy emerged from a decade of neglect and a short but destructive conflict with its human capital and physical capital severely diminished. Economic institutions were virtually nonexistent, and the vacuum was in some cases filled by parallel structures of dubious legality. The financial system was obliterated, and the economy had reverted to cash-based transactions. Against this background, the work of reconstruction and institution building undertaken by the international community since the end of the conflict is impressive. Today, Kosovo’s economy has a recognizable face: private business is thriving, financial intermediation is restarting in a supervised manner, and there is a government providing public services partly financed through taxation. There are, of course, severe shortcomings and distortions in almost every part of this economy, but the nuts-and-bolts are there.