The Impact of Corruption on Kosovo’s Economy

Muhamet Sadiku, Executive Director

The Riinvest Institute

CIPE Feature Service

The long-term consequences of corruption in a transition economy, especially one that

that is in a post-communist and post conflict phase like Kosovo’s, can be extremely
harmful. Kosovo is currently undergoing a very difficult process of infrastructure
reconstruction and economic policy development. Kosovar society is also working to
establish democratic institutions and reform the political decision making process.
Already, great improvements have been made in the area of presidential elections and
appointing the Prime Minister.

As we strive for independence, the absence of a duly elected government has kept the
problem of corruption and its consequences outside the focus of the political parties, and
civil society groups. In order to bring attention to this problem, the Riinvest Institute has
conducted surveys and specific research to generate valuable information relating to
corrupt practices, however, more are needed. A lack of reliable information made it
difficult for The United Nations Mission in Kosovo (UNMIK) or others to develop a
program to combat corruption.

Prevention would be the best solution and would prove to be an effective way to fight the
corruption successfully in the long term. Public opinion in Kosovo favors a more active
approach to address the issue of corruption, but currently, the public can only guess about
how deeply the corruption exists. This continuing doubt and the inability of the
government to address the problem, undermines the government’s credibility in the eyes
of the public and weakens democratic and market reform efforts.

The Riinvest Institute carried out a survey of 600 businesses in December 2001 to
promote the market economy and create the institutional framework for business growth.
Part of this research dealt with identifying the obstacles to business development, and
found that corruption was cited as one of the main obstacles for doing business, ranking
7th out of 14 obstacles. Several of the other obstacles cited were considerably linked with
corruption including two that were ranked first and second. These were institutional
problems including the absence of a legislative framework needed to address business
concerns, and unfair competition due to insider trading and non-transparent procurement
practices.

The Riinvest survey found that over 54 percent of respondents cited corruption as a
problem that they had to deal with as a part of day-to-day business. Over 80 percent felt
that unfair competition, as a consequence of corruption, was a detriment to doing
business in Kosovo. The transitional nature of the current government and uncertain
status of the region have created an institutional vacuum resulting in a lack of laws and
regulations, fostering corruption and hampering business development.
Further undermining the government’s authority and ability to combat corruption is the
problem of tax evasion. A sizable informal sector remains untaxable, but even among
legitimate business that responded to our survey, many cited high rates of taxes, and a
lack of a tax-paying tradition for the problem. But again, corruption was a factor in
driving tax evasion. Without adequate administrative procedures and controls, tax
collection represents an opportunity for dishonest officials to solicit bribes and grant
favors. The unequal and unfair application of tax collection also undermines the rule of
law and creates an absence of respect for the tax law and its administration.

The inability of the legislative and executive branches to address corruption is caused by
institutional factors as well as the lack of information or research identifying the sources
of corrupt practices. This situation makes it difficult to build a strategy and a prevention
program to combat corruption at the national level or integrate this effort with regional
and international programs. Given the current circumstances, which are characterized by
a transition and rebuilding process and development of a market economy, it is important
to focus on the factors that are creating institutional and macroeconomic instability in
Kosovo.

Destabilizing factors hurting reform efforts include, uncertainty regarding the dynamics
of the transfer of UNMIK to the elected government, an incomplete legislative process
for building a market economy, the absence of anti-trust laws that regulate monopolies,
and the need to create regulations for a competitive environment and a level playing field
for all market participants. The lack of uniform customs and taxation regulations is also a
major problem. For example, the products that are imported from Albania are levied a
VAT tax of 26.5 percent, while imports from other countries around Kosovo are required
to pay only a 15 percent VAT tax. This disparity creates incentives for falsifying the
origin of the products imported and results in non-payment of customs.

If efforts to combat corruption are to succeed there will need to be an effort to create
awareness in the society and to address the supply side of corruption by promoting
corporate governance and business ethics. Civil society’s commitment including that of
the business community, business associations, political parties, media and other NGOs
should be emphasized in order to reinforce the need for transparent and monitoring
practices that have an important role in preventing corruption, and the legislation and
procedures for the establishment of new businesses should be simplified for easier access
to the market and to investors.

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