Effects of global risk in transition countries 537 SYLQA Driton & KELMENDI Venera - The economic policy trends in Kosovo, challenges and growth THE ECONOMIC POLICY TRENDS IN KOSOVO, CHALLENGES AND GROWTH Driton SYLQA, UPP / Haxhi Zeka Venera KELMENDI UPP / Haxhi Zeka Abstract In the context of slow economic growth in recent years and fiscal pressures, Kosovo is faced with the complex challenge of unemployment, which still remains at a high level. The demand for labor is still very low and establishment of a favorable environment that would create sustainable jobs will be a challenging task that requires reforms in the economic policy. Hence, this paper addresses one of the deepest challenges of Kosovo that is domestic economic capacity to generate economic growth. By analyzing the economic factors affecting economic development, this paper identifies barriers and though discusses real opportunities for a better economic growth pattern to finaly highlight the recomendations. Keywords: labor market, economic growth, economic challenges, sustainable development. JEL classification: M1, Q01, Q5 Introduction Kosovo’s economy has not remained unaffected by the crisis which is being faced by developed economies, especially those of the euro area. According to Central Bank of Kosovo, the Real GDP growth in 2012 reached 3.8 percent, while the main source of growth was the growth of public sector capital investments. However, the economic growth rate in Kosovo is expected to be lower compared to the previous years. The risks comming from the Eurozone crisis are being reflected mainly through the negative impact on the external demand for Kosovo’s products (even though the level of exports is already low), the slight negative impact on remittances, and through a more pronounced impact on the foreign direct investments. This is not a model for sustainable growth and, moreover, it is not sufficient to create jobs for the roughly 45% unemployed and the 30,000 new entrants to the labor market each year. Lack of reliable energy, lack of an enabling business environment, poor infrastructure, and an unskilled workforce are among the major constraints facing Kosovo’s economy. Kosovo has a highly import-dependent economy, with exports comprising less than 10% of GDP in 2012 – the lowest proportion of exports to GDP in any transition economy in Europe. Kosovo’s productivity in the agriculture sector has declined to the point where the country is not able to feed itself. Despite its history as an agricultural producer, Kosovo currently runs a trade deficit of over €144.6 million in agricultural products. A significant amount of arable land (34%) is in meadows and pastures or lies fallow. One-third of farmers do not cultivate all of their land. With an unemployment rate in rural areas running higher than the national average, the development of agriculture is a key priority for poverty reduction and economic growth. Kosovo's economy continues to face structural problems, with the high level of imports relative to exports leading to a significantly negative trade balance. The high level of trade deficit continues to be the main contributing factor to the high level of current account deficit, which is partly mitigated by the current transfers. However, in the first half of 2012, remittances declined slightly compared to the previous year. A more significant drop was noticed in the Foreign Direct Investments (FDI), which fell down by 53.3 %, adversely affecting the financial account balance. Unlike in 2011, the prices during the first half of 2012 grew more slowly. Inflation rate was 1.5 percent compared to 9.6 percent in the previous year. 1 Foreign investments are considered to have played a very important role in rebuilding the economies of the countries in transition from centrally planned economies to market economies. Of long was recognized that FDI brings benefits for these countries, FDIs are important because they include bringing new technologies and knowledge to domestic firms, increased competition, and further increasing access for exports abroad. The distribution of FDI among developing countries is irregular: some of them have more difficulties to attract foreign investment than others. 2 General information of economy trends It has not been easy to assess the role played by the SMEs in Kosovo’s postwar development. Development of entrepreneurship hasn't been a dynamic process in Kosovo influenced considerably by changes in domestic business environment as well as the external influence, which is typical for a small country with open economy. Development of entrepreneurship through SMEs development formation has supported at a certain level economic development in Kosovo, the growth in employment and decrease in unemployment. SMEs contribute in GDP and serve as promoters of development. In Kosovo, micro, small and medium enterprises have had an impact on GDP growth, which are presented below. 1 Financial Stability Report, December 2012 2 Ghiassi, Spera, 2003, p.17