State-Building in Kosovo

Democracy, Corruption and the EU in the Balkans

Andrea Lorenzo Capussela

• Publisher: I.B. Tauris
• Year: 2015
• ISBN:
  9780857738882
• Edition: 1
• Topic: History
• Subtopic: European History
• Index: History

The history of Kosovo is a complicated one which typifies the darker side of modern Balkan history. Milosevic s Serbia withdrew from Kosovo in 1999 and the province was handed over to a special UN body who governed until 2008, when the West allowed Kosovo to become independent. The aim was to erect a stable and well governed democracy, but the outcome was a fragile state, which still threatens the stability of the Balkans and Europe s internal security. How did this happen? Here, Andrea Lorenzo Capussela offers an inside look at the process of building democracy in Kosovo. As head of the economics unit of Kosovo s international supervisor, Capussela has had access to previously unknown sources and information regarding the roles of the EU and the US in the crisis. This will be an essential reading for those studying the Kosovo crisis.

CHAPTER 1

THE CONCEPTUAL
FRAMEWORK

Introduction: the arguments for a political economy approach to state-building

State-building is generally defined as the development of transparent and accountable political institutions, a sustainable economic system, a professional public administration and civilian-controlled security forces.¹ And it is often understood as an exercise undertaken by external actors in war-torn or developing societies, in order to eradicate the causes of conflict, instability or poverty. In essence, state-building is an attempt to spark or accelerate processes of institutional transformation that elsewhere have taken place spontaneously, leading to the emergence of stable democracies and efficient economies.

The profound effects that state-building can have on the recipient society open the question of the democratic legitimacy of such interventions, and expose them to the criticism that they amount to a form of imperialism.² This question is not very relevant in the case of Kosovo, however, because its population has genuinely embraced the liberal political and economic institutions erected by the UN protectorate. A separate issue, which we shall consider, concerns the lack of democratic accountability of Kosovo’s international administrators and supervisors, and the coordination between their powers and the so-called ‘local ownership’ principle.

By reason of its aims, a state-building intervention requires clarity about what political and economic institutions are appropriate to the recipient society, among several possible models, and a strategy for sequencing and implementing the necessary reforms. Both the choice of the models and the formulation of the strategy require an understanding of how such transitions have occurred in the past, and a diagnosis of the pre-existing institutions and the social, economic and political forces that can influence their reform: in other words, they require a theory of transitions and a political-economic analysis.

The intimate links between politics, economics, violence and the state are implicit in the very notion of state-building. Yet, until very recently ‘the political economy of conflict-affected countries [has] remained woefully underexplored in the existing statebuilding literature’, as the editors of a recent contribution to such studies remarked.³ The focus of their book is ‘the impact of state-building interventions on the political economy of war-torn societies’ and the reasons why such interventions have often fallen short of expectations.⁴ Its value lies primarily in demonstrating the merit of approaching state-building from a political economy perspective, on the argument that it acknowledges the eminently political nature of such interventions, which influence the distribution of power and resources in the recipient societies; it encompasses their formal as well as informal political and economic structures; and it explicitly recognizes the fact that international actors become themselves part of the political economy of the recipient society, giving rise to dynamics that have frequently had perverse unintended effects, as these studies profusely exemplify.⁵ Hence the criticism, in particular, of ‘technocratic approaches to state-building’ that fail to consider such dynamics and, rather, treat developing societies as the passive, inert recipients of ‘inputs’: a notable example is the approach that relies chiefly on constitutional engineering, which has repeatedly been applied in Kosovo and has produced unsatisfactory results.⁶ Little or no explicit attention is given to two separate but equally important issues, however: the method for analysing the political economy of post-conflict societies, and the question of how their transition towards a more stable and efficient equilibrium can be achieved.

Disposing of such a method is necessary for designing a state-building intervention, which can hardly succeed without a reliable theory about how the desired transition can be set in motion and sustained. Indeed, we shall contend that in Kosovo the international community obtained unsatisfactory results precisely because it lacked (or chose not to follow) such a theory, and because it misread (or ignored) the political economy of that society.

A convincing framework for organizing our discussion is offered by recent studies on the interplay between economic and political institutions, on the structure of the diverse social orders that history has produced, and on the transition between different social orders. This line of research stems from the observation that neoclassical economic theory rests on extreme implicit assumptions about the role of the state, which is deemed to control violence, enforce property rights, protect competition and more generally ensure that economic exchange is effectively frictionless. Questioning these assumptions led to a study of the institutions that underpin the functioning of markets, which in turn stimulated an inquiry into the mutual influences between economic and political institutions: from the results of this research a broader theory emerged, about social orders, violence and the transition from less to more open social orders. The results of these studies have not yet been employed by the literature on state-building, but they seem the most appropriate guide for our investigation.

Institutions and prosperity

Neoclassical theories of economic growth focus on the accumulation of human and physical capital and on technological innovation. These, however, seem only the proximate causes of growth, not its fundamental determinants: what leads certain countries to innovate more than others? Why do they invest more and have better schools? In other words, why is Norway between 100 and 400 times richer than Burundi, depending on the measure used, and is poverty the latter’s inevitable destiny?

Four main answers have been given to these questions: geography, and therefore climate, exposure to diseases, endowment of natural resources and proximity to transport routes; trade and integration in international markets; culture, religion and beliefs, following Max Weber’s theory; and institutions.⁷ A growing literature holds that the quality of the institutions of a country is a first-order cause of its long-term growth, and has greater impact on cross-country differences in economic performance than geography, trade integration or cultural traditions.⁸

In laying the seed for this school of thought, the economist who re-founded the study of institutions, Douglass North, defined them as ‘the rules of the game in a society or, more formally…the humanly devised constraints that shape human interaction’: in other words, they are the framework within which political, social and economic exchange occurs.⁹ Among them, economists have primarily looked at the regulation of property rights, contracts, corporations and markets, which structures the incentives of households and firms and thus influences the organization of production and economic exchange, the allocation of resources, the investment in capital and innovation, and the distribution of wealth.¹⁰ In their simplest form their conclusions seem intuitive, and can be traced back to Adam Smith: if the right to property is not well-designed and effectively protected, if the contracts by which such rights are exchanged cannot predictably be enforced, and if the markets where such exchanges occur are not open to competition, there will be little incentive or opportunity to invest and innovate, resources will not be allocated to their most efficient use, productivity and growth will remain below their potential, and markets will be smaller than they would otherwise be, including the crucial market for capital.¹¹ Inversely, societies whose economy is organized around institutions that effectively protect property rights, contracts and competition are more likely to invest, innovate and prosper. Hence, the efficiency of institutions – quite apart from the question of their fairness – can be judged objectively, depending on whether they enhance aggregate economic growth and social welfare.¹²

These theories have increasingly been adopted by development organizations as part of the scientific background for their work.¹³ And the World Bank has developed two respected and widely used sets of indicators of the quality of institutions: the Worldwide Governance Indicators and the Doing Business indicators.¹⁴ We shall employ both, together with other indicators.

The emergence of inefficient institutions

But how and why do inefficient institutions emerge and persist? Culture, beliefs, customs and legal traditions certainly influence the shape of a society’s institutions, but a more persuasive line of reasoning moves from the observation that institutions are the product of the collective choices of a polity, and that they determine not only the allocation of resources but also the distribution of wealth.¹⁵ Social groups holding political power will therefore want to adopt institutions that allow them to capture a disproportionate share of the resources and profits of an economy. But such institutions are typically inefficient ones – such as institutions that permit the predation of property rights, to use an extreme example, or allow firms to extract rents by closing their markets to new entrants – and therefore in order to appropriate a larger share of wealth these groups must organize the economy in such a way that the overall wealth produced is smaller than it could be otherwise. Other social groups will oppose this, whether because they wish to receive a larger share themselves or because they care about the aggregate growth of the economy, and the conflict between these two sets of interests will be solved depending on their relative political strength, and not only on the merits of the conflicting proposals as to the shape of the institutions.

The political power of each group, in turn, is determined by their strength inside the institutions where de jure political power resides, but also by the availability of material resources – such as money to advertise one’s views – on which their de facto political power is based; and the distribution of such resources depends on the institutions that organize the economy, namely the framework within which households and firms take economic decisions and the government makes economic policy. Distinguishing between political and economic institutions, on one hand, and between de jure and de facto political power, on the other hand, clarifies the picture. If the future design of the economic institutions is being debated, the existing political institutions and the existing distribution of resources will influence the outcome of the debate. This, in turn, will determine the future performance of the economy, the future distribution of resources and, indirectly, also the future distribution of de facto political power. In the absence of constraints to its political power, the existing elite will typically prevail in such a debate: the new economic institutions will accordingly distribute to its members a disproportionate share of the resources of the economy, which the elite will then be able to use in order to reshape the political institutions too in such a way as to increase also its own de jure political power. In this way, in the next round of the game the elite will extract an even larger share of the resources and profits produced by the economy and the political power they afford.

It is thus that an elite can perpetuate, at once, both its own power and the ‘extractive’ economic and political institutions on which that power rests.¹⁶ And if these institutions are inefficient – which they will typically be, for the elite cannot credibly commit to protect property rights or competition if its own economic and political power ultimately depends on weakening them¹⁷ – the misallocation of the resources of the economy will also be perpetuated, to the detriment of social welfare.

Political and economic institutions

This is perhaps the most striking feature of this interpretation, and certainly the most relevant one for the study of Kosovo’s evolution since 1999. While it is economic institutions that directly influence economic outcomes, the long-term performance of an economy depends to a large extent on the quality of its political institutions, whose openness is crucial: if they place effective checks on the elite and constrain its ability to reshape the institutions to its own advantage, and if power is diffused, or can easily change hands because the political system is competitive and pluralistic, the emergence of inefficient institutions, both economic and political, will be less likely.

For instance, it has been argued persuasively that it is primarily the quality of its political institutions that explains Botswana’s relative prosperity, a country which has escaped the ‘diamond curse’ and whose GDP per capita is about four times greater than the average in sub-Saharan Africa: poverty – a development scholar recently wrote – results from ‘a shortage of rights’ before ‘the unchecked power of the state’ (and the elite that controls it).¹⁸ Indeed, economists have often investigated the correlation between economic performance and institutions that are more usually associated with the health of a democracy, such as the accountability of governments and the role of the mass media, or the electoral systems and the form of government.¹⁹ And the so-called transition countries of Central and Eastern Europe are of particular interest from this perspective, because since 1989 they have radically reformed both their economic and their political institutions, with widely diverging results.²⁰

In this vein, two of the authors whose theories we just outlined, Daron Acemoglu and James Robinson, have recently addressed the question of whether democracy – and not just ‘inclusive’ political institutions, which is a more capacious definition – hinders or favours economic growth. This has long been a matter of debate, because although the correlations between democracy and prosperity are supported by ample empirical evidence the existence and direction of a causal link remains unclear. Contrary to ‘[t]he view that democracy is a constraint on economic growth’, which is ‘gaining ground’, such authors identified an ‘economically and statistically significant positive correlation between democracy and future GDP per capita’, and concluded that:

democracy raises growth [through channels that include] greater economic reforms, greater investment in primary schooling and better health, and may also include greater investment, greater taxation and public good provision, and lower social unrest.²¹

These very recent findings rest on econometric analysis that is likely to be subject to careful scrutiny, and might for now have to be read with some caution. But they confirm, and find normative support in, Amartya Sen’s compelling arguments on the ‘constitutive and instrumental role’ of individual freedoms and democracy for development.²² Indeed, whatever doubts may remain about their role in favouring prosperity, individual freedoms and democracy ought to be the primary end and the primary means of state building.

An illustration drawn from Kosovo

In such summary form, the theories outlined above might seem axiomatic: an episode that occurred in Kosovo can serve as an illustration. In early 2009, the government decided to make the import of several foodstuffs subject to a system of licences, to be awarded by tender, which would have handed over to one or a handful of firms a large and competitive market where about 300 traders operated.²³ The government did not explain the rationale for this measure, which was neither justified by public health concerns nor had been called for by either traders or consumers. Its probable aim was its direct effect: eliminating, or drastically reducing, competition in that market by erecting a barrier to entry (the licences and their limited number). And its motive, presumably, was the rewards that the governing elite expected to receive from the winners of the tender. The food importers protested against this measure vociferously, but parliament, ...