Perspectives | Economy

The covered-up stagnation of the private sector

By - 06.06.2019

Behind Kosovo’s acclaimed ‘ease of doing business,’ private enterprise struggles.

Kosovo’s private sector receives acclaim and shame. It is considered the backbone of Kosovo’s economic growth, while at the same time being subject of major criticism, especially concerning the working conditions and the treatment of the labor force.

Moreover, being considered as the driving force of growth, the private sector is expected to expand, despite numerous challenges and barriers they themselves claim they have. The private sector, apart from promoting development, it is also expected to be a direct contributor to more and better employment opportunities.

However, the shortcomings of the business environment, combined with the limited market, and issues pertaining to rule of law, are hindrances to achieving the higher potential of the private sector. As a result, Kosovo’s private sector, while continuously developing, remains below its potential. This piece looks at Kosovo’s private sector, using data published by Open Data Kosovo, as well as reports from local and international organizations.

The business environment

While Kosovo’s private sector has been facing continuous challenges in the past years, Kosovo’s business environment has continuously improved in rankings of reports and analyses of local and international organizations. Most notably, Kosovo has taken major steps in improving the Doing Business ranking in the World Bank Doing Business Report.

Kosovo has been included in this report from 2011, and since then, it has improved from being ranked among countries in the lower quartile, to being ranked 44th out of 190 countries in the world, in the most recent report. While Kosovo’s progress was not sufficient to compete with regional neighbors until 2017, in 2019, Kosovo has surpassed all but North Macedonia.

Kosovo’s private sector is also ailed by a state of stagnation and is failing to expand.

These improvements have been widely considered as good news, especially by policy makers. The progress is mainly attributed to the easing of administrative procedures directly related to indicators in the doing business report. The ease of starting a business, getting construction permits and paying taxes, is a result of procedural improvements, that do not necessarily reflect real improvements in implementation.

It is clear that the Doing Business Report represents a much more important publication for policy makers than for business owners and potential investors. Studies conducted with countries included in the Doing Business report show that around 85 percent of policymakers consider the report and the ranking as a motivation for reform, however, the majority do not consider it as a guide to action. This impact is further aggravated in developing countries, where policies may be too focused on improving rankings in such reports, rather than on real improvement of the business environment.

This is also true for Kosovo. Government institutions responsible for spearheading the progress made in the report claim success. On the other hand, the private sector still reports difficulties of doing business in Kosovo. The main barriers hindering the development of the private sector are related to corruption, informality and unfair competition, as well as the limited market.

While measures of procedural and policy progress show Kosovo to be in the right path, there is still much needed progress to be done in improving the real business environment, especially in terms of battling corruption and informality. Until these barriers are surpassed, Kosovo’s private sector might show a steady progress, but will not be likely to be a major driving force behind economic success.

Kosovo’s private sector

While a thriving business environment is a necessary condition for private sector growth, it is not sufficient. Kosovo’s private sector is also ailed by a state of stagnation and is failing to expand.

Even though Kosovo has a considerable number of businesses operating in expanding sectors, there is a high concentration of businesses in trade and retail, with more than half of the businesses operating in these sectors, according to the Open Business Database. Sectors with potential for growth, job-creation, and export, such as manufacturing and information and communications technology (ICT), remain underdeveloped and hold an underutilized potential.

It seems very unlikely that the private sector will generate the employment that is necessary to have visible growth impact.

The entry into force of the Stabilization and Association Agreement (SAA) in 2016 between the EU and Kosovo has been expected to improve productivity of Kosovar enterprises and to have a positive impact on economic growth, but the results remain yet to be seen. For the SAA to have a notable positive impact, sectors that have export potential and those that have potential to be involved in global value chains need to be further developed. It is clear that trade and retail sectors do not hold such potential.

Overall, the top activities that businesses are engaged in within their sectors show little improvement towards productive activities throughout the years. The majority of businesses operating in the service industry, operate in catering services. The majority of businesses operating in construction are involved in the construction of residential buildings. Businesses operating in the trade and retail sector are mostly dealing in food, beverages, and retail clothing. As a result, even with some potential within these sectors, businesses are mainly concentrated in consumption activities.

According to the Open Business platform, the vast majority of active businesses in Kosovo are microenterprises and small enterprises. Namely, 98 percent of all enterprises in Kosovo are microenterprises, employing one to nine people. Out of the 165,268 active businesses in Kosovo, 421 are medium enterprises, employing 50-249 people, and only 82 are listed as large enterprises with more than 251 employees.

Women in Kosovo generally do not inherit capital and only around eight percent of women own property.

Moreover, more than 80 percent of businesses are registered as individual businesses, which more often than not are means for self-employment, rather than based on plans for future growth.

Given the saturated public sector as an employer, the private sector is considered the main driver of growth and of employment opportunities. However, due to the small size of existing enterprises, with a continuing trend of not expanding their staff, it seems very unlikely that the private sector will generate the employment that is necessary to have visible growth impact.

Women in Kosovo’s private sector

While the private sector in general is in a less than desirable position, it is even more problematic when analyzed through a gendered lens. According to Riinvest Institute’s survey, only around 10 percent of businesses in Kosovo are owned by women. Those are almost exclusively microenterprises. The main sectors in which women-owned businesses operate are in hairdressing and other beauty treatment services, followed by retail, especially food stores, as well as clothing and textile stores.

As is the case across the world, Kosovar women face greater challenges in starting and running their own businesses than men. Women entrepreneurs in Kosovo highlight barriers to doing business both related to societal factors, such as family obligations and difficulties in accessing finance, as well as market barriers, which are similar to those men face.

The low number of women as business owners in Kosovo is severely influenced by the societal expectations for women to be homemakers or only work as employees, rather than run their own businesses. This issue is further worsened when considering the need for capital in order to start and operate a business, which for Kosovar women is an impediment.

Most of women entrepreneurs in Kosovo are self-starters motivated by the additional income and economic independence that having their own businesses would provide them with.

Women in Kosovo generally do not inherit capital and only around eight percent of women own property, which presents a problem for the growth of the business, especially in terms of access to finance. Most therefore rely on their husbands, fathers, or brothers for support in declaring collateral for loans.

Access to property and a lack of inheritance is considered a barrier that male entrepreneurs do not face. Gender-specific barriers to doing business, combined with a concentration of women in less productive sectors of the economy, presents a worrying perspective of women entrepreneurs in Kosovo.

Beyond this, the number of women-owned businesses does not show a very positive trend, according to data from the Open Business platform. Riinvest Institute’s analysis of women entrepreneurship in Kosovo shows that women consider their own lack of experience in business management and lack of training to be obstacles in operating their business. Such difficulties are rarely listed by male business owners.

Despite differences in sectors and size of enterprises, women and men differ in their approach to hiring staff. Riinvest Institute found that women who own small businesses use more standard criteria in hiring staff when compared to men. Women-owned business in Kosovo also have a considerably lower turnover than those of men, they employ a lower number of workers, and are concentrated in low value-added sectors.

To foster the growth of the private sector, a well-functioning business environment is key.

Despite difficulties, most of women entrepreneurs in Kosovo are self-starters motivated by the additional income and economic independence that having their own businesses would provide them with.

However, in terms of barriers, men and women entrepreneurs both consider the small market, tax rates, and informality as major barriers to doing business. These barriers reflect the state of the business environment, which despite ranking well in World Bank’s Doing Business, in reality remains struggling.

One major difference is the intensity that business owners assign to corruption as a barrier to doing business, with women ranking it as a lower barrier, while men ranking this as the second highest barrier to conducting business, according to Riinvest’s survey. A share of this difference is explained by the fact that women operate smaller businesses that do not engage in public procurement or high-value deals, where the perception of corruption is more dominant. However, studies show that women tend to put more weight to internalized barriers, such as their own lack of experience in running a business, and less weight to external factors.

Overall, Kosovo’s economic future is reliant on the growth and development of the private sector, as an essential factor for the socio-economic development of the country. However, to foster the growth of the private sector, a well-functioning business environment is key. In order to foster sustainable and inclusive development, it is crucial to take major steps in improving rule of law and fighting corruption, informality, and discriminatory practices.

Kosovo has found it easy to modify the legal framework and administrative procedures in order to superficially improve the environment for doing business. To ensure that private sector development takes the form of long term and sustainable growth, the next steps need to address more substantial aspects. The only way for this to happen is to make sure that future steps are geared towards inclusive and non-discriminatory growth.

Feature image: Faton Selani / K2.0

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