Myth Busting in Kosovo

Bardhyl Salihu

Kosovo is Europe’s newest country after declaring independence from Serbia in 2008. It is at the same time Europe’s poorest country—with unemployment approaching a staggering 49% and around 30% of the population living below the “poverty line.” However, as bad as Kosovo’s standard of living may be, it nevertheless is an example which can debunk many myths in economics. This is so because while the Government is heavily involved in the economy, it still lacks the power to legislate and enforce many standard European or Anglo-Saxon economic regulations. Yet despite the absence of these allegedly “essential” Government interventions, the economy still lives.

Now people may be baffled that I chose such a poor country as an example of disproving the myth that Government intervention in the economy is essential. However, bear in mind that when crank economists say that we need labor laws, for example, they don’t say “or else you’ll be poor like Kosovo.” No. What they say is “you’ll go back to 19th century, Industrial Revolution, working 17 hours a day at a wage of 170 Euros per month, little-kids-in-the-factory-like situation.”[1] It’s important to understand that while Kosovo is indeed poor, it is not so for the same reasons which are used to justify these Government interventions. The reason why Kosovo is poor befalls almost entirely on its Government which has been blocking economic development ever since 1999.

Myth #1: “Without a central bank, the monetary system will go crazy.”

Wrong. Kosovo uses Euro as a currency, but it does so unofficially because it’s neither part of the European Union nor the Eurozone. As a result, the central bank of Kosovo is unable to conduct monetary policy. Instead, it superficially oversees the commercial banks as well as the insurance companies. Despite having the highest interest rates in the region,[2] Kosovo’s monetary system has been stable ever since 1999 as well as its switch from the German Mark in 2002. No major bank insolvencies have occurred, prices have never experienced volatile fluctuations and the risk of inflation has only recently emerged due to the policies of the European Central Bank which have affected the whole Europe anyway.

Myth #2: Without labor laws, “you’ll be back to 19th century, Industrial Revolution, working 17 hours a day at a wage of 170 Euros per month, little-kids-in-the-factory-like situation.”

Wrong. While Kosovo has one of the lowest wage rates in the region, the situation is far from what is supposed to be according to the myths that warn about the “danger” of not having labor laws. Both the business community as well as the common worker recognizes that the economic reality of low productivity cannot be magically changed through Government-mandated arbitrary laws. Wages in Kosovo are low because the workers’ productivity is low, and the workers’ productivity is low because the capital goods that they have to work with are either inferior or scarce in quantity. Thus, the only way to increase wages is to increase the capital invested per capita.

Although minimum wage laws and other workplace regulations exist in a separate statute called “employment law,” they are very loosely enforced. Labor unions on the other hand are active but are rarely given the privilege of using Government coercion in enforcing claims against employers. However, contrary to socialist myths that without Government backing unions are futile, unions in Kosovo actually do arrive at collective agreements with the business community from time to time. This is one of the few areas the Government has got things right—it hasn’t intervened. If the Government imposed any further restrictions on the labor market the unemployment rate would shoot upward even more.

Myth #3: “Vital services and natural monopolies like electricity, water or railways should always be left to the Government.”

Wrong. Twelve years have passed since the Government has monopolized the provision of electricity, water and railways among other things. Electricity shortages have been a common occurrence and continue to this day despite pouring hundreds of millions of Euros into the Kosovo Energy Corporation (KEC). It is estimated today that KEC loses 2 million Euros every day due to its inability to collect fees in some regions of Kosovo. Private firms have helped bridge the gap by selling big- and small-size electricity generators, although to no avail. The Government has retained its heavyweight title as the number one polluter by failing to install adequate filters and filling the villages around the thermo power plants with thick smog.

The story is no different with concern to the provision of tap water. Many neighborhoods in the capital city Prishtina have to do without water from around 23:00 up to 06:00 every day. When during the summer the level of water goes down in the two main lakes which serve as a source, the situation becomes even worse and water shortages can be common even during the day. The unpleasantness of having to conserve water in the hottest temperatures during summer—also made possible by water tank systems sold by private companies—is indescribable.

The railways are almost entirely dysfunctional and cover only a few cities. The coaches are old, smelly and the customer service is bad. Despite various donations and several offers from private companies to privatize the system, the Government has held onto it, degrading the capital value of the infrastructure further.

A similar story is with other “vital” services which are supposed to be under Government control, such as the telecommunications system, the roads, the airport, or the postal services. While it is true that these services have been provided in much better ways by Governments in different countries, Kosovo nevertheless shows that the contention that only the Government can provide them is a myth.

Myth #4: “Without anti-trust laws, private companies will achieve a monopoly status, leading to high prices and low quality.”

Wrong. The vague anti-trust laws have been very rarely enforced but Kosovo has yet to see a private sector monopoly price gouging, providing low-quality services or harassing customers. In fact, as is seen in the west, the only existent monopolies are those that the Government has created either directly or indirectly. The Government has directly monopolized the above-mentioned services of electricity, water, roads, railways, telecommunications, education, airports, garbage collection, and heating among others. However, it has also given exclusive privileges to private companies through public tenders thereby effectively ending competition. It runs a corrupt licensing (and accreditation) system whose only purpose is to serve as a guild-like monopoly privilege granting machine which enriches the political class at the expense of the customers and the taxpayers.

Poor analysis has led some analysts to suggest that the banking sector is acting as an oligopoly because the interest rates are “high.” However, this sort of assumption means the debate has started on the wrong foot. Only individuals can subjectively determine whether a price is “high” or “low.” No general case can be made about the “expensiveness” or the “cheapness” of prices. What is a “normal” interest rate? If one can’t come up with a meaningful number, then one can’t differentiate between a “high” and a “low” interest rate. The fact that Kosovo has the highest interest rates in the region doesn’t show anything other than the fact that economic realities in Kosovo are different from other countries. The flawed debate about the banking sector is an example of using statistics without a clear theoretical framework. The concerns about the banking sector being an oligopoly because the interests rates are not “what they should be” are therefore unfounded.

Myth #5: “Without intellectual property laws, there’s a disincentive to produce art.”

Wrong. Despite nearly nonexistent intellectual property laws, art has not lagged behind. Music is by far the most common form, reachable not only for professional singers but also for newcomers who have successfully used their home studios to record music and distribute it privately. Professional recording and distributing studios pay the good singers who have earned their name for their records and then try to make a profit by selling them. Despite almost full access to the same songs online for free, various singers have earned a lot of money. Most of their money has come from concerts and private arrangements. However, the free sharing of their music online has made it a lot easier for them to get booked if they’re good.

Other forms of art, such as theatre or movies are far less popular than music, but that simply reflects the tastes of the consumers. In a market economy, the consumers direct the production of goods and services, and the fact that the movie industry has not developed as much as the music industry simply shows that the cost doesn’t justify the expense.

Kosovo is a poor country, but it has a lot to show for when it comes to disproving economic myths that have been persistent for decades. Libertarians are often accused of being dreamers and not pointing out to specific real life examples to back up their claims. However, the reality is very different in that Kosovo is an example that shows the Government is an unnecessary evil.

[1] I’m not making this up. This is roughly what my “European Employment Law” class professor said when discussing why we “need” labor laws.

[2] Bear in mind that a comparison with the neighboring countries is not entirely rational because they artificially reduce their interest rates through their central banks, which can actually conduct monetary policy. This is not a blessing but rather a curse because it induces inflation and sets the process for a business cycle.