It is a great honor, not only for me, but also for my country, to be invited to speak at an event about what the world can learn from Kosova. As many of you know, the Republic of Kosova is Europe’s youngest state. We declared independence merely 17 years ago. And only 26 years have passed since our people emerged from a decade of brutal repression and apartheid, which culminated in the last genocide of the twentieth century. And yet, despite this — or perhaps because of it — we are immensely proud of what we have accomplished, and what we are able to contribute to the world.
The main topic of this event is how governments can support ordinary citizens in a global economic crisis — in particular, the cost-of-living crisis, which most of the world’s countries have been fighting for the past four years. Although the worst of this crisis seems to have passed, we are still not out of the woods. Ordinary citizens around the world continue to face significantly higher prices. And, as with many crises, this one has also laid bare the gross inequalities that have made so many people vulnerable to global economic shocks generally.
Against this background, I hope that Kosova’s story will be relevant, in at least two ways. First, the story of how our Government has come to the aid of Kosova’s people in these challenging times may give other countries’ policymakers a set of useful ideas on how to channel aid towards those who need it the most. Second, and equally important, Kosova has managed to do this without raising tax rates or increasing public debt. At a time when many countries’ economies are crippled by obligations to creditors, it is vital for governments to think not only about how they can best support their citizens, but also how to do so without plunging themselves into a dangerous spiral of exponentially increasing debt and interest payments.
It would be impossible — and quite boring for the audience — to list every single measure the Kosova Government has implemented to help our citizens cope with the global rise in prices: There have simply been too many. Indeed, perhaps the most important lesson from our experience is that, in the midst of an economic crisis, it is vital for policymakers to think creatively — to exploit every tool at their disposal. Governments must fire on all cylinders if they hope to meet with success.
Kosova’s success, I believe, comes from the fact that we have done precisely this. Our response to inflation has been multi-pronged, combining three different kinds of policies.
First, we had to intervene to contain the inflation, wherever and however we could. We identified two main factors contributing to the rising cost of living. One was higher import prices, which resulted from the combination of a post-pandemic demand shock and higher energy and commodity prices due to the war in Ukraine. The other was corporate greed, manifested through price-gouging and increasing profit margins under the guise of an inflationary environment.
Being a relatively small economy, there wasn’t much we could do to change import prices. But we set ourselves the task of boosting local farmers and small manufacturers, so that they could substitute at least some of the expensive imports. We doubled financial support for farmers, so that they could increase their yield and capacities. This then allowed them to provide local manufacturers with cheaper and locally sourced raw materials. We helped absorb the electricity price-shock by subsidizing the price difference — for households and businesses alike — in the first year of the crisis. This way, we ensured that families got the relief they needed, but also that there were no cascading price increases for locally manufactured goods. We also established a support scheme for small and medium manufacturers. According to the terms of this initiative, manufacturers were eligible to receive a grant of up to 20% of the loan principal, for any loan taken out to buy automated machinery for the purpose of increasing manufacturing capacities. In addition, we launched the Diaspora Investment Window as part of our Credit Guarantee Fund, through which our diaspora members can take out investment loans to set up a business in Kosova and bring their expertise back home, without having to put up any asset as collateral. These measures not only helped to contain at least some of the inflation in the short term, but they also set the stage for increasing exports once the situation stabilized in the years that followed.
As for price gouging, we had legislation in place that regulated the profit margins of fuel like diesel and gasoline. I must emphasize the phrase “profit cap” instead of “price cap”. By putting a cap on profits rather than on prices, we made sure that there was no harm to consumers, while also ensuring that there was no shortage of supply, something that tends to happen with price caps: When prices are set below cost, businesses simply stop selling. We made use of profit caps whenever we saw that profit margins were being unjustifiably expanded, and we imposed a gross profit cap of 15 euro cents a liter — or for the audience here, about 67 dollar cents a gallon.
This proved quite successful, as it prevented an inflationary spiral, considering that fuel is a major component of any industry.
Following a similar approach, we adopted two other laws, one for regulating profit margins on pharmaceutical products, and another one doing the same for basic goods like bread, flour, cooking oil, hygiene products, and so on. While the first one for pharmaceuticals has entered into force and is being implemented, the law on basic goods was unfortunately blocked by our Constitutional Court (the equivalent of your Supreme Court here), after the opposition parties contested it. The Court struck down the law as unconstitutional, under the pretext that it violated free market principles. This was the same Court that, just months before this ruling, had concluded in another case that the salaries of judges and other high-ranking public officials were not to be determined by the market, but were to be considered an “earned entitlement.” This ruling came after we proposed to reduce their salaries to decrease the inequality between the highest and lowest salaries in the public sector. So, the very same Court that felt so strongly about the free market when it came to providing relief for low-income households, didn’t feel the same about the free market when it came to their own exorbitant salaries.
I have not shied away from criticizing Constitutional Court decisions when I believe they are wrong-headed, or even hypocritical as in this case. I see this as my duty not only as a public official, but as a lifelong political activist, raised in the tradition of open, democratic critique. I can say without a doubt, that no court decision in the past four years has been more painful to me than the one prohibiting profit caps on basic goods, because it has caused so much harm to Kosova’s most vulnerable citizens and families.
Fortunately, however, we also implemented a number of policies of a different kind: those that provided direct relief to households. We have found ways to reduce the burden of families, either by taking some of the weight off of their shoulders, or by simply re-adjusting the criteria in innovative ways. Among these measures:
- We made public universities free of charge for all Bachelor’s and Master’s students. We also launched a scholarship program targeted toward women in STEM. Kosova now has the highest proportion of women studying STEM subjects in the region.
- We enlarged the list of government-covered medications for patients with cancer, diabetes, and other diseases, so they could have more of their expenses paid for. For this we had to double the budget allocation, which means that significantly more money remains in the pockets of families.
- Since salaries are paid once at the end of each month, we decided to advance the date on when pensions are paid. Instead of at the end of the month, they are now disbursed on the 15th day of the month. This ensures that households receive a cash infusion every two weeks instead of once a month, thereby helping families with their budgeting and cash flow.
- For the first year, we subsidized households that conserved electricity – we paid them double the cost of every kWh of reduction in their household consumption, on a month-to-month basis. So if you consumed 100 kWh less than in the same month during the previous year, we paid the equivalent of 200 kWh as a subsidy directly to your invoice. There were cases when citizens went to pay electricity and the employer on the other side of the desk said, you owe nothing, the system owes you. This was a lucrative deal — both for us and for households: We spent about 20 million on the measure, but in return we saved the budget approximately 70 million euros that would have otherwise gone to subsidize expensive electricity imports.
- We subsidized households investing in thermal insulation and energy efficiency so as to reduce their electricity consumption in the long term as well.
Third, we took steps to protect and increase household purchasing power. This was a bit tricky to do, because the last thing an economy undergoing inflation needs is more money in circulation. Nonetheless, we had to make sure that those who were most vulnerable were taken care of first. Therefore:
- We raised the minimum wage, after it had been left unchanged for more than a decade. About a third of the entire workforce benefited from this. We also exempted the minimum wage from income tax, another boon for families in need.
- We reformed the public sector salary system by reducing the gap between the highest and lowest salaries – from 20:1 as it used to be, to 4:1 as it is now. We applied four gradual yearly raises, out of which the last two were absolute rather than proportional increases, thus helping those with the lowest salaries the most. For example, if everyone receives a $100 raise, those with a lower salary will benefit more, in percentage terms, than those with a higher salary. This has helped close the gap even further between the lowest and highest salaries in the public sector. Over the course of our four-year term, the average public-sector salary increased by 46%.
- We introduced a universal child allowance scheme which currently amounts to 1.5% of our GDP. The monthly payments are paid directly into the mother’s account.
- We also introduced a youth employment program that pays the equivalent of a minimum wage for the first 6 months to each business that hires an unemployed young person aged 18-29. Our monitoring shows that two out of every three employees are retained even after the subsidy expires. This persuaded us to extend the program to women of all ages, especially those who have been absent from the job market and therefore have difficulties in finding work.
- We initially set a minimum pension level, thereby increasing all pensions that were below that minimum. And then, in the second phase, we implemented a 20% across-the-board increase for all state-funded pensions.
We have implemented all these measures, and more, while maintaining a budget deficit that is smaller than any of the past budget deficits during the pre-pandemic years. As unreal as it sounds, we didn’t increase a single tax rate either. Therefore, the comparison is as ceteris paribus as it gets.
So how did we do it?
Although we inherited a right-wing tax policy of a flat 10% for corporate income tax, a top marginal rate of 10% for personal income tax, no dividend tax, and a Value Added Tax of 18% (the lowest in the region), the difference that we made was in how we redistributed the money we collected.
We incentivized employment and new manufacturing capacities by subsidizing it directly. We encouraged productivity and efficiency, while at the same time guaranteeing a decent standard of living for those who are most in need or who can’t participate in the labor market – for poor households, children, the elderly, and students.
Instead of expensive trophy projects that benefit a small number of large firms, we made sure to focus on building new schools and kindergartens, bridges, and regional roads that connect villages and remote areas. This way, in addition to helping local communities with better infrastructure, these numerous smaller projects actually ended up creating more jobs. And they also distribute the budget more evenly to help reduce inequality.
The decrease in social inequality that has resulted from our policies has generated a positive feedback loop — not a vicious but a virtuous circle. A more even distribution of resources leads to still greater economic growth, which can again be widely shared among the entire population. This is a pattern we have seen repeatedly in our economic data over the past four years. It constitutes a powerful argument for a social-democratic society, in which all citizens share in society’s economic progress.
This growth has translated to increased revenues without having to increase tax rates. The average economic growth over the past four years has been 6%, with the lowest year never falling below 4% – which used to be the average growth rate during normal pre-pandemic years.
Much of the impressive performance of Kosova’s economy can be traced back to government spending. The increases in direct support to households, as well as private-sector stimulus, has been responsible for much of the growth we have seen. But part of the growth is also attributable to our progress on anti-corruption and rule of law. Foreign companies are much more willing to invest in a country if they are not forced to bribe public officials in order to enter the local market. This has helped lead to a doubling of foreign direct investment over the past four years. Furthermore, when people and businesses are optimistic about the direction of the government and the country, they tend to spend rather than save, providing yet another stimulus for growth.
We have made anti-corruption and rule of law a central priority of our governance. The results have been widely recognized by independent international observers. For example, since we took office in 2021, Kosova has improved an astounding 31 places in Transparency International’s Corruption Perceptions Index, achieving its highest ever score in the index. And just this week, Gallup’s Global Safety Report ranked our country third in the world and first in Europe on law and order.
When people know that their taxes are being well spent and not abused, they are more easily convinced to also pay their fair share in taxes, thus making it easier to reduce informality.
For instance, many businesses that previously operated in the informal market are now legally registered, thereby substantially increasing our tax base and allowing us to keep rates low. This increased registration of businesses accounts for at least part of the massive decrease in the official unemployment rate, from 25.8% when we took office, to 10.9% in the latest available statistics.
So, a government that fights corruption and supports its people by reducing social inequality can actually do so without pushing its public debt to unsustainable levels. This is how we managed to implement the largest support package for the cost of living and energy crisis, according to the World Bank, and the highest GDP growth in the region, without increasing the budget deficit, and while keeping our public debt the lowest in Europe (17% of GDP). In other words, we are growing sustainably, and with our economy grows the well-being of our citizens. The average salary increased by 57% in the private sector in the last 4 years, and total salaries paid increased by 62% for the same period, which accounts for the new jobs added to the economy as well.
I sincerely hope that the achievements I have outlined thus far may hold some useful lessons for other countries. But I also want to be very clear: The fight against inequality is far from over. Just as inflationary pressures around the world have not fully subsided, so also is Kosova’s story on this subject still being written. What our Government has accomplished over the past four years is only the beginning, not the end of that story. The citizens of Kosova, just as those of other countries, are still in need of strong government support. We therefore plan to continue with another major expansion of support to our citizens during our next four-year mandate. It is my hope that these plans can serve as an additional source of fruitful policy ideas, which I look forward to discussing with you as I take your questions.
Thank you very much.
