WORLD BANK GROUP Boosting Export Performance November 2021 Kosovo Country Economic Memorandum  1 Kosovo Country Economic Memorandum Boosting Exports Table of Contents Acknowledgments 6 List of Acronyms 7 Executive Summary 8 Mapping Kosovo’s Trade 11 Exporter Dynamics at the Firm Level  21 Trade Policy 33 Policy Options for Increasing Export Growth in Kosovo 37 Spotlight - Digitalization and Digital Trade 43 Regulatory Readiness Assessment for Digital Trade  63 References 77 Methodology and Definitions 81 Sector Stakeholders 91 2  Figures Fig 1. Contributions to growth Fig 17. Correlation between number of Fig 31. Firms reporting increasing use in Kosovo and comparator exporters of goods per million of digital technologies, by firm countries, 2010–19 p.12 people and GDP per capita in size p.46 Fig 2. Current account and trade Kosovo and selected country Fig 32. Use of online sales, by sector balance in Kosovo and groups p.24 and firm size, April 2020 and comparators, 2010–19 p.13 Fig 18. Correlation between median June-July 2021 p.46 Fig 3. Kosovo’s trade balance, export value per firm and GDP Fig 33. Average fixed broadband 2010–20 p.13 per capita (PPP). Current US$, penetration in selected in logs in Kosovo and selected countries, 2020 p.47 Fig 4. Cumulative growth of exports countries p.25 and imports in Kosovo, Fig 34. Fixed broadband penetration in 2010–20 p.14 Fig 19. Number of products exported Kosovo, by municipality, fourth and destinations served by quarter 2020 p.48 Fig 5. Exports of goods and services firms in Kosovo, 2013–19 p.25 per capita by selected countries Fig 35. Mean fixed and mobile in the region, circa 2018 p.14 Fig 20. Average of products exported broadband download and and destinations served per upload speeds, October 2021 Fig 6. Exports of goods and services firm, by country p.27 p.49 per capita by Kosovo and selected country groups, circa Fig 21. Number of Kosovar firms Fig 36. Price of high-speed fixed 2018 p.15 entering and exiting exporting broadband as share of monthly activity, 2014–1 p.28 disposable income for bottom Fig 7. Goods exports index for countries in the Western Fig 22. Entry, exit, and net entry into 40 percent of the population, Balkans, 2010–20 p.15 exporting in selected countries 2020 p.50 p.28 Fig 37. Mobile connections in Western Fig 8. Goods exports index for countries in the Western Fig 23. Fraction of new exporters Balkan countries, 2020 p.50 Balkans, 2010–20 p.16 surviving after entry according Fig 38. Radio frequency spectrum to the initial export value assigned to mobile network Fig 9. Exports of commodities and (divided in quintiles). Year 0 = operators in Western Balkan goods other than commodities entry year, percent p.29 countries, 2019 p.51 by Kosovo and selected comparators, 2019–21 p.16 Fig 24. Number of firms exporting Fig 39. Assigned and unassigned services and their export value spectrum in Kosovo in relevant Fig 10. Services Exports Index for of services, 2013–18 p.30 bands p.52 Kosovo and peer countries, 2010–19 p.17 Fig 25. Share of exporters and value of Fig 40. Cost of mobile broadband exports in the services sector, as percentage of disposable Fig 11. Composition of goods exports by subsector p.31 income of bottom 40 of the in Kosovo, 2010 and 2019 p.17 Fig 26. Distribution of exports of population in Western Balkan Fig 12. Composition of services goods and services, by export countries, 2020 p.52 exports and imports in Kosovo, value p.31 Fig 41. Account ownership, use of 2010–19 p.18 Fig 27. Kosovo Services Trade debit/credit cards and digital Fig 13. Composition of services restrictiveness index, by payments, and reasons for exports and imports in Kosovo services subsector, 2020 p.35 not owning a bank account in and peers, 2019 p.19 Fig 28. Use of the Internet for ordering selected countries, 2017 p.55 Fig 14. Kosovo’s main trading partners goods and services in Kosovo, Fig 42. Main policy areas for a for goods exports and imports, 2018–20 p.44 regulatory framework for 2009–20 p.19 Fig 29. Source of goods and services digital trade p.64 Fig 15. Number and share of firms consumers in Kosovo Fig 43. Digital regulatory index for in Kosovo exporting goods, purchased over the Internet, selected countries, 2021 p.65 2013–19 p.22 2018–20 p.45 Fig 44. Stages of consumer protection Fig 16. Difference in performance of Fig 30. Concerns of Kosovars about regulations p.67 exporters and nonexporters in shopping online, 2020 p.45 Kosovo p.23  3 Tables Table 1.  Share of firms in Kosovo Table 4.  Value and share of automatic Table A.2  Relationship between that exported between 2013 teller machine (ATM) productivity and the number and 2019, by number of and point-of-sale (POS) of destinations served and employees p.23 transactions in Kosovo, 2021 products exported p.83 Table 2.  Share of firms and export p.56 Table A.3  Determinants of survival value by number of products Table 5.  Automatic teller machines after the entry year (marginal exported and destinations (ATMs) and point-of-sale effects) p.85 served by firms in Kosovo, (POS) terminals in Kosovo, Table A.4  Network effects p.86 2019 p.26 2019 p.57 Table A.5  Export to countries outside Table 3.  Number of cash and noncash Table 6.  Cybersecurity requirements of the Western Balkans p.88 transactions in Kosovo, the European Union’s General Table A.6  Credit access by exporters 2005–19 p.56 Data Protection Regulation p.89 (GDPR) p.72 Table B.1  Major stakeholders in the Table A.1  Exporting premia in Kosovo digital economy sector p.92 p.82 Boxes Box 1. OECD principles for protection of consumers using e-commerce p.68 Box 2. The Manila Principles for Intermediary Liability p.74 4  © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org.  5 Acknowledgments This background note was prepared as part of the Kosovo Country Economic Memorandum, led by Aslı Şenkal. John Douglas Gillson, Vicky Chemutai, and Aslı Şenkal led the team that prepared the note, which consisted of Karen Muramatsu and John Douglas Gillson (services trade); Vicky Chemutai (goods trade and trade policy); Leonardo Iacovone, Matias Belacin, and Aslı Şenkal (export dynamics); Oya Pınar Ardıç Alper, Nenad Bosiljic, Francesco Di Salvo, and Gynedi Srinivas (e-payments); Lillyana Sophia Daza Jaller and Martin Molinuevo (digital trade regulatory framework); Violane Konar-Leacy and Mimoza Miftari (trade facilitation); and Natalija Gelvanovska Garcia (digital connectivity). Blerta Qerimi, Besart Myderrizi, and Eda Emil provided inputs for sections of the report. Linda Van Gelder (Country Director, Western Balkans); Massimiliano Paolucci (Country Manager, Kosovo and North Macedonia); Antonio Nucifora (Practice Manager, Macroeconomic, Trade and Investment Global Practice); and Jasmin Chakeri (Macroeconomic, Trade, and Investment Global Practice) oversaw this work. The analysis benefitted from comments by Richard Record (Lead Economist, Western Balkans). The team is grateful to the Kosovo Customs Agency and the Central Bank of Kosovo for their timely response to data requests and insights. It is grateful to the Ministry of Economy; the Ministry of Trade, Industry and Entrepreneurship (MINT); the Central Bank of Kosovo; and the Kosovo Business Associations for their insights into the digital trade section. 6  List of Acronyms ACH Automatic clearinghouse AIP Information and Privacy Agency AP5 Additional Protocol 5 ARKEP Electronic and Postal Communications Authority B2B business-to-business CBAM European Union common border adjustment mechanism CEFTA Central European Free Trade Agreement CSO Certification service provider EDD Exporter Dynamics Database EU European Union FDI Foreign direct investment GDP Gross domestic product GDPR General Data Protection Regulation GHz Gigahertz GVC Global value chain HS Harmonized system ICT Information and communications technology IPS Interbank payment system ISP Internet service provider KIESA Kosovo Investment and Enterprise Support Agency LAC Latin America and the Caribbean LPPD Law on the Protection of Personal Data Mbps Megabits per second MHz Megahertz MINT Ministry of Trade, Industry, and Entrepreneurship MLEC Model Law on Electronic Commerce MNO Mobile network operator MSMEs Micro, small, and medium-size enterprises MVNO Mobile virtual network operator NBFI Nonbank financial institutions NFTC National Trade Facilitation Committee NPRS National Retail Payments Strategy NPS National payment system OECD Organisation for Economic Co-operation and Development POS Point-of-sale PPP Purchasing power parity PSP Payment service provider REPI Regulation on electronic payment instruments RTGS Real-time gross settlement SAA Stabilization and Association Agreement STRI Services Trade Restrictiveness Index TFA Trade Facilitation Agreement TFP Total factor productivity UNCITRAL United Nations Commission on International Trade Law UNCTAD United Nations Conference on Trade and Development WDI World Development Indicators WTO World Trade Organization  7 Executive Summary Improving Kosovo’s export competitiveness could help to catalyze growth and reduce poverty. As a small economy, Kosovo would benefit from integration, both globally and regionally, to exploit scale economies from access to a larger market. Higher exports would not only contribute to growth and lower current account deficits but could also help heighten productivity due to more innovation and learning by exporting. Exporting firms, which are more competitive, would also be able to create better jobs and economic opportunities for Kosovars. This background note examines export dynamics in Kosovo over the period 2010–19, benchmarking Kosovo against relevant comparator countries. It overviews Kosovo’s trade structure, export dynamics at the firm level, trade policy and regulatory framework, and constraints to trade in goods and services and identifies policy options for consolidating trade growth in growing sectors. The note also spotlights digitalization and digital trade. It analyzes the enabling environment and suggests policies to enhance digital connectivity, improve the regulatory environment for digital trade, and encourage the use of e- payments. Kosovo’s exports underperform regional peers and countries with similar income per capita. Kosovo’s total exports of goods and services per capita are the lowest in the region and are less than what its level of income would suggest, largely because of the low base and weak performance of goods exports, which is partially offset by a services trade surplus. The steady increase in services exports is a welcome outcome, but it is driven mainly by tourism-related services exports to the Kosovar diaspora. While the base is low, exports have been growing quickly. Export value more than doubled between 2010 and 2019 in nominal terms. However, as imports grew from a higher base, net exports subtracted from GDP growth. This implies that Kosovo’s exports continue to underperform in relative terms. More encouragingly, during the first half of 2021, exports grew faster in Kosovo than in the region as a whole. Weak export performance in Kosovo reflects underlying constraints that limit the country’s capacity to competitively sell products and services abroad. The underperformance of exports throughout 2009-2019 suggests significant obstacles for Kosovo’s companies to sell their products in new markets, which may be simultaneously related to a lack of firm productivity growth and to obstacles in the business and trade environment. External conditions may favor faster export growth if competitiveness at the local level is improved. Diversification is increasing, albeit slowly. Kosovo’s merchandise exports are concentrated in a limited number of products, mostly metals and minerals. However, concurrent with the recent dynamism in the private sector, diversification has been increasing in manufacturing. For services trade, there is still significant potential for diversification as traditional services, mainly travel and transport account for more than 90 percent of all services exports. The uptick in information and communications technology (ICT) and professional services exports suggests that Kosovo is developing a comparative advantage in modern services, which could be accelerated through faster digital adoption. Greater diversification of both goods and services exports would reduce Kosovo’s exposure to external demand shocks. Exporting is rare and challenging for Kosovar firms, but trading links are growing. Fewer than 6 percent of registered firms in Kosovo export, and fewer than half of exporters continue to export a year after entering a new market. Reaching new markets seems to be difficult for Kosovar firms, which are more likely to export new products than to serve new destinations, although serving new destinations explains a larger portion of the increase in exports. Between 2013 and 2019, the number of goods exporters and the average number of destinations served, number of products sold, and product-destination combinations per firm rose. Kosovo’s trade regime is relatively open from a regulatory and trade policy perspective, as evident from the free trade agreements in which it participates. A trade-to-GDP ratio averaging 80 percent of GDP in the decade before the COVID-19 pandemic attests to Kosovo’s openness to trade (WDI 2020). Kosovo’s main trading partners are countries with which it has trade agreements, such as the Central European Free Trade Agreement (CEFTA), including Western Balkan countries and EU member states. In most sectors, Kosovo is more open to trade in services than its peers, although there are some restrictions on trade in professional services. Creating a productivity enhancing business environment and leveraging Kosovo’s comparative advantages would improve export competitiveness. Enabling businesses to innovate and increase productivity would encourage exports, as more productive firms select into exporting. Addressing business environment constraints such as improving electricity access, restoring confidence in the judicial recourses, improving the licensing and permits and business inspections regime are crucial for Kosovar firms so that they are not held back. Boosting exports also requires developing and harnessing the skills of Kosovo’s young population while laying the foundations of a business environment that is more conducive to trade and investment. If leveraged, Kosovo’s strengths—its relatively low labor costs, 8  young population, favorable tax regime, and proximity to a large affluent market—could improve the country’s competitiveness in the global marketplace. Improving regional integration, creating an attractive environment for foreign direct investment (FDI), and leveraging diaspora ties could also help boost export performance. A number of factors other than productivity affect Kosovar firms’ success in international markets. Firms that have already exported to the Western Balkans have a much greater chance of entering other markets; network effects also seem to matter. In destinations where Kosovar products are sold, entry into exporting and survival probability are much higher. FDI net inflows also correlate with export market survival. Firms are more likely to enter new markets in countries with a Kosovar diaspora presence. Hence, improving regional integration and FDI attraction and participation in global value chains and better leveraging diaspora ties have the potential to boost Kosovar exports. Better access to credit would support exporter survival in the global marketplace. Less than a third of Kosovar firms have access to credit. Exporters of goods have greater access to credit, account for a larger share of credit, and have access to larger and less expensive loans than the average firm. Credit access is also positively linked to better performance for goods exporters. Firms that have access to credit are also more likely to survive in foreign markets. There is, however, a very weak correlation between credit access and productivity, suggesting the potential misallocation of credit and limitations in credit access. In addition, services exporters have lower access to financing than goods exporters. Improvements in access to finance could boost exports. Kosovo has an important opportunity in digitalizing firms and promoting digital trade in both goods and services. Kosovo’s ICT services exports rose by a third during 2008 to 2020. ICT and professional services have also created jobs in recent years, suggesting that Kosovo is developing a comparative advantage in modern services, which could be facilitated through faster digital adoption. Kosovo made a head start in digitalization by investing in and increasing the coverage of its broadband infrastructure, which should now be leveraged for private sector development. Accelerating digital transformation and e-commerce—by improving digital connectivity, enabling electronic payments (e-payments), and improving and ensuring effective implementation of a legal framework for digital trade—could create growth opportunities for micro, small, and medium-size enterprises, by improving access to local and global markets. Furthermore, incentivizing digitalization has the potential to reduce the large gender gap in entrepreneurship. Female entrepreneurs showed much higher digital readiness before the pandemic, but they also adopted more digital solutions during the pandemic, compared to male entrepreneurs. Five main policy recommendations emerge from this report: 1. Promote the conditions for higher firm productivity and innovation. Continuously monitoring and simplifying licensing and permitting regimes; improving coordination of business inspections through risk-based inspections to reduce regulatory costs and uncertainty; ensuring adequate energy supply, including from renewable sources; investing in skills; addressing barriers to competition; and above all, strengthening the rule of law are crucial to create an environment that is conducive to higher productivity and investment. 2. Facilitate increased market access for Kosovar exporters. Kosovo’s free trade agreements govern the overall framework for trade, and tariffs are low. However, businesses note non-tariff barriers as one of the top constraints to exporting, including as a result of the non-recognition of Kosovo in a number of markets. Continued negotiations with trading partners to reduce nontariff barriers could increase goods exports. Eliminating terminal fees, harmonizing sanitary and phytosanitary testing reports, and establishing a risk management unit in the food and veterinary agency would also help facilitate goods exports. 3. Attract more and better-quality FDI. A business-friendly environment is a precondition to attracting higher and better job-creating FDI. Sharpening the focus of FDI attraction and retention efforts through a new FDI strategy, enhancing investor services by empowering the Kosovo Investment and Enterprise Support Agency (KIESA), and increasing investor confidence by improving after-care services are essential to attracting and retaining FDI. 4. Improve regional integration and promote it as a springboard for better integration with the EU and global markets. The distance to and GDP of trading partners affects both the number of exporting firms and the number of exported products to a destination. Improving regional integration could improve Kosovar firms’ export performance and support entry into the EU market. Reducing barriers at the border throughout streamlined trade facilitation would also help to reduce trading costs. 5. Create an enabling environment for digitalization of firms and e-commerce. Widely available, affordable, and high-speed Internet access, the availability of secure e-payments instruments, and a conducive regulatory framework for digital trade are crucial to promote e-commerce and the adoption of digital technologies.  9 01 Mapping Kosovo’s Trade Kosovo’s trade structure reflects its natural resource endowments, strong diaspora ties, and growing international integration into the broader region. If leveraged, Kosovo’s youthful population, favorable tax regime, and proximity to some 500 million people could be important assets. Kosovo is rich in natural mining resources (lignite, lead, zinc, silver and gold, silicate mines of nickel and cobalt, iron, nickel, bauxite, manganese, and nonmetallic minerals) as well as geological materials that can be used in industry and construction. Base metal and mineral exports have therefore dominated Kosovo’s export structure, together with diaspora-related tourism exports. Although landlocked, Kosovo also engages in transit trade by its neighbors that are further inland. With 40 percent of the population under 25, Kosovo can leverage emerging digital technologies, which could help it achieve much greater international integration and faster growth. Exports of information and communications technology (ICT) and professional services increased over the last decade and present an opportunity for supporting growth. Kosovo could have grown faster had net exports made a positive contribution to growth. Net exports contributed to growth in Kosovo’s structural and aspirational peers.1 In contrast, in Kosovo they reduced growth in the decade leading up to the pandemic (figure 1). Kosovo also lagged Western Balkan countries, where net exports made a negative but negligible contribution to growth. Kosovo’s current account balance was on par with that of other Western Balkan countries but lower than its structural peers. Figure 1. Contributions to growth in Kosovo and comparator countries, 2010–19 5 Gross fixed capital formation Public consumption 4 Private consumption 3 Changes in inventories Net exports 2 1 0 -1 -2 -3 Kosovo Structural Peers Aspirational Peers Western Balkans Kosovo has been able to maintain a large trade deficit, driven largely by goods imports, thanks to large inflows from the diaspora (figure 2). Large remittance inflows and foreign direct investment (FDI) in real estate continue to finance the trade deficit. 1 Structural peers are chosen based on population size, income per capita, and other structural characteristics. They include Albania, Armenia, the Kyrgyz Republic, Moldova, and North Macedonia. Aspirational peers are chosen based on population size and include the Czech Republic, Estonia, Latvia, Lithuania, Slovenia, and Uruguay. 12 Mapping Kosovo’s Trade Figure 2. Current account and trade balance in Kosovo and comparators, 2010–19 8 Current account balance Trade Balance 3 -2 -7 -12 -17 -22 -27 -32 Kosovo Structural Peers Aspirational Peers Western Balkans Source: World Development Indicators, 2019 Kosovo’s trade surplus in services helps offset its trade deficit in goods. The trade deficit narrowed slightly over the decade leading up to the pandemic, as export growth outpaced import growth, drive mainly by services exports (figures 3 and 4). Growth in services exports is a welcome outcome, but the COVID-19 pandemic exposed inherent structural vulnerabilities. With a 51 percent decline in tourism exports in 2020, Kosovo’s economy contracted 5.3 percent, driven largely by international travel restrictions. The uptick in goods exports only partially compensated for the drop in 2020. Figure 3. Kosovo’s trade balance, 2010–20 40 Exports Merchandise Imports Services 30 Exports Services 20 Trade balance 10 Imports Merchandise 0 -10 -20 -30 -40 -50 -60 -70 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Data from the Central Bank of Kosovo. Mapping Kosovo’s Trade 13 Figure 4. Cumulative growth of exports and imports in Kosovo, 2010–20 240 Total exports Total imports 220 Goods exports 200 Goods imports 180 Service exports Services imports 160 140 120 100 80 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Data from the Central Bank of Kosovo. Poor exporting performance reflects competitiveness problems, particularly in goods. In 2018, Kosovo exported US$1,168 in goods and services per capita, giving it the lowest export-to- population ratio among its aspirational and regional peers. Total exports per capita were less than one-third those of the average for the Western Balkans in 2018 (figure 5), even after controlling for income. The distance between Kosovo’s actual and expected goods exports is even greater when the analysis is restricted to exports of goods (figure 6). Only a few countries perform worse than Kosovo in terms of distance from the level of exports projected based on income. This finding suggests that Kosovo’s poor exporting performance is not driven entirely by its level of development or regional dynamics but by a general lack of competitiveness, which limits its capacity to export products and services and gain international recognition. Figure 5. Exports of goods and services per capita by selected countries in the region, circa 2018 Slovenia 21,747 Slovak Rep. 17,792 European Union 17,588 Czech Rep. 17,549 Estonia 17,294 Lituania 15,097 Latvia 10,719 Croatia 7,601 Uruguay 4,909 Montenegro 3,883 Serbia 3,742 North Macedonia 3,737 Bosnia and Herzegovina 2,459 Albania 1,682 Moldova 1,377 Kosovo 1,288 Kyrgyz Rep. 481 Source: Data from World Development Indicators. Note: Data are latest available for the 2018–19 period. 14 Mapping Kosovo’s Trade Figure 6. Exports of goods and services per capita by Kosovo and selected country groups, circa 2018 a) Goods and services b) Goods 14 12 Exports of goods per capita (log) R² = 0.8958 12 10 10 8 8 R² = 0.7935 6 6 4 4 GDP per capita, PPP (log) GDP per capita, PPP (log) 2 2 6 7 8 9 10 11 12 6 7 8 9 10 11 12 Low income Middle-lower income Upper-middle income High income Aspirational peers Comparators Kosovo Source: Data from the Kosovo Agency of Statistics. Note: GDP per capita is measured at purchasing power parity (PPP) and current US$. Exports of goods and services are measured in current US$. The year 2018 was chosen to maximize the sample size2 as indicator displays structural economic performance. External conditions could favor faster export growth if domestic competitiveness improved. In 2019, exports of goods amounted to US$440 million, only about 10 percent higher than in 2010 (US$396 million) (figure 7). During this period, export flows fluctuated considerably, driven mostly by changes in the prices and volumes of base metals and minerals export. The goods export index for the region reveals that between 2010 and 2019, the value of export goods increased much less in Kosovo than in the other Western Balkan economies except Montenegro (figure 8).3 Goods exports by Kosovo increased markedly between 2019 and 2020; it is too early to know whether this growth will continue in the coming decade. Figure 7. Goods exports index for countries in the Western Balkans, 2010–20 530 million US$ 532 480 440 445 440 430 427 430 396 387 380 362 358 341 330 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: National authorities 2 Countries are classified according to the World Bank’s income level classification. 3 Total factor productivity growth grew slightly between 2015 and 2018. 2017. Alternative productivity measures, such as value-added and sales per worker, did not change or even decrease during this period. Mapping Kosovo’s Trade 15 Figure 8. Goods exports index for countries in the Western Balkans, 2010–20 240 KOS 220 MNE 200 BIH 180 ALB MKD 160 SRB 140 120 100 80 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: National authorities. In the first half of 2021, Kosovo saw a considerable pick-up in export growth, despite the pandemic. Growth of goods exports was faster than the regional average, albeit from a lower base. The increase reflected both a pick-up in metal and mineral prices as well as increases in manufactured goods exports (figure 9). The increase in non-commodity exports was broad-based, with textiles and machinery, appliances, and electric appliances among the main contributors to goods export growth. Figure 9. Exports of commodities and goods other than commodities by Kosovo and selected comparators, 2019–21 a) Commodities, Index (2019 = 100) 220 200 180 KOS 160 MNE 140 BIH 120 ALB 100 MKD 80 SRB 60 40 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul 2019 2020 2021 Source: Data from national statistical offices. b) Goods other than commodities, Index (2019 = 100) 220 KOS 200 MNE 180 BIH 160 ALB 140 MKD 120 SRB 100 80 60 40 Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul 2019 2020 2021 Source: Data from national statistical offices. 16 Mapping Kosovo’s Trade Services contribute directly to growth and employment; but they are also key inputs into the production of other services and goods. Modern services such as professional services and ICT, as well as traditional services such as transport, are key inputs for other sectors. To integrate into and thrive as part of global value chains, manufacturing and agriculture require a dynamic domestic services sector. Productivity growth in services is a driver of GDP growth in both countries in the Organisation for Economic Co-operation and Development (OECD) and developing countries.4 In contrast to goods exports, growth of services exports in Kosovo has been stronger than in comparator countries (figure 10). The services sector has been the main engine of growth in Kosovo, accounting for almost half of all economic activity and 80 percent of employment in 2019 (KAS, 2019). Its importance is reflected in the composition of Kosovo’s exports. The share of services in exports grew over the decade preceding the pandemic, reaching 81 percent in 2019. This share is much larger than that of Kosovo’s structural peers (42.7 percent) and aspirational peers (21.6 percent) (WDI, 2019). Figure 10. Services Exports Index for Kosovo and peer countries, 2010–19 300 250 200 150 100 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Kosovo Structural Peers Aspirational Peers Source: World Development Indicators. Metal and minerals account for the lion’s share of export value, exposing Kosovo to price shocks. Diversification of goods exports has been increasing, however, with the share of base metals and minerals have declined from about 77 percent in 2010 to 48 percent in 2019 (figure 11). The share of rubber and plastics increased from 2.8 percent in 2010 to 13.2 percent in 2019. Exports of vegetable products, processed food, and beverages are also significant, an indication of an increase in industrial processing. Figure 11. Composition of goods exports in Kosovo, 2010 and 2019 a) 2010 b) 2019 4 4 4 6 4 63 35 Base metals and 10 articles of base metal 13 Machinery, appliances, electrical Processed food, 3 beverages and tobacco 10 Plastics, rubber an darticles thereof Vegetable products Mineral products 13 Source: Central Bank of Kosovo. 4 In Indonesia, for example, the services sector reforms that were implemented in the aftermath of the East Asian crisis of 1997–98 explain almost 10 percent of the productivity growth of manufacturers between 1997 and 2009 (Hollweg and others 2015). The more open services sector improved the quality of services inputs, increased varieties, and reduced prices, benefitting firms in downstream sectors. Mapping Kosovo’s Trade 17 Like its goods exports, Kosovo’s services exports are highly concentrated. Traditional services, such as transport and travel, require face-to-face interaction; modern services, such as ICT and financial services, can be traded across borders remotely. In 2019, travel services accounted for 80 percent of total services exports and 45 percent of total services imports (figure 12). Its share of total services trade increased since 2009. Figure 12. Composition of services exports and imports in Kosovo, 2010–19 a) Exports b) Imports 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Goods-related Financial Transport Royalties Travel ICT Construction Other Business Insurance Personal Source: IMF Balance of Payments (BOP) and International investment Position (IIP). Given Kosovo’s demographics and good broadband infrastructure, ICT sector has significant potential for growth but there are challenges. Exports represented only about 10 percent of sales in the sector in 2018. ICT exports increased in 2019 and 2020 and imports decreased, however, reflecting an increase in domestic production of ICT services. However, despite the widely available broadband infrastructure, ICT exports as a share of total exports remain much smaller than the structural and aspirational peers. This sector presents a significant opportunity to drive services growth given Kosovo’s young population and investments in digital infrastructure. Modern services represent a smaller share of total services exports in Kosovo than in comparator countries. Most high-income countries have a higher share of modern services in exports of services. Delivery of modern services is less dependent on physical infrastructure and more dependent on reliable telecommunications and electrical supplies. In addition to being important inputs into production, modern services tend to exhibit higher productivity and generate higher-skilled and better-paid jobs. However, many modern services sectors have relatively low employment intensity and require higher educational levels. The share of goods-related services, which is closely linked to participation in global value chains and include manufacturing services on physical inputs owned by others, accounted for just 0.2 percent of Kosovo’s total commercial services exports in 2019—a much smaller share than the 12.6 percent among structural peers and 6.7 percent among aspirational peers (figure 13). Moreover, visits by the diaspora represent the bulk of Kosovo’s travel exports. In 2020, travel services exports plunged by 51 percent, revealing the vulnerabilities associated with heavy dependence on travel services exports. 18 Mapping Kosovo’s Trade Figure 13. Composition of services exports and imports in Kosovo and peers, 2019 a) Exports b) Imports 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% Kosovo Structural Peers Aspirational Peers Kosovo Structural Peers Aspirational Peers Goods-related Financial Transport Royalties Travel ICT Construction Other Business Insurance Personal Source: Data from UNCTAD and IMF Balance of payments and international investment position In both goods and services, Kosovo trades mainly with neighboring countries and countries with which it has trade agreements. Between 2010-2018 trade with Western Balkan countries has increased and drove export growth. Exports to the European Union and CEFTA continue to be the main destinations for goods exports (figure 14). About three-quarters of all services exports go to the European Union (especially Germany, Austria, and Italy) and CEFTA member countries (especially Albania, Serbia, and North Macedonia). About three-fifths of all services imports come from these countries as well (Abugattas et al, 2020). Figure 14. Kosovo’s main trading partners for goods exports and imports, 2009–20 a) Exports b) Imports 500 3,500 450 3,000 400 350 2,500 300 2,000 250 200 1,500 150 1,000 100 500 50 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 EU CEFTA Turkey China Other EU CEFTA Turkey China Other Source: Central Bank of Kosovo. Mapping Kosovo’s Trade 19 02 Exporter Dynamics at the Firm Level International trade can contribute to growth by fostering higher productivity. Greater exposure to trade can increase domestic competition by leading to better allocation of resources between firms and more churning of unproductive firms (Melitz 2003; Melitz and Ottaviano 2008). Increased competition from imported products can also incentivize innovation, increasing productivity. Exporting can expand production opportunities and allow firms to explore new technologies to serve and compete in larger markets. It is therefore important to understand exports dynamics at the firm level, in order to identify barriers to higher productivity. This section analyses data from the Kosovo Customs Database, which contains transaction-level (product-destination-year) information on goods exports and imports and allows the tracking of firm entry and exit into and out of destination markets. Most of the analysis is of goods exports, based on data from the Kosovo Customs Database. However, using Kosovo Tax Registry and the Kosovo Credit Registry this section also examines the behavior of services exporters. Finally, the analysis also looks to some extent credit access for exporters. The analysis benchmarks Kosovo’s export performance against that of similar countries for which data are available, using the World Bank’s Exporter Dynamics Database (EDD) 2.0, a dataset that provides information from Customs. Together, these datasets reveal key patterns of firm exporting behavior in Kosovo and the factors undermining trade performance. Main Characteristics of Goods Exporters in Kosovo The number of exporters of goods increased between 2013 and 2019, both absolutely and as a share of all registered active businesses. Kosovo’s goods export performance trailed that of its peers before the pandemic, with many companies entering foreign markets between 2013 and 2019. In 2019, 1,783 firms sold products abroad, 70 percent more than in 2013 (figure 15). The share of registered businesses exporting goods also grew, from 3.3 percent to 5.6 percent, suggesting that exporting performance in goods is gradually improving. Figure 15. Number and share of firms in Kosovo exporting goods, 2013–19 Share of firms (%) 2,400 8 Firms 1,784 1,783 1,651 6 1,600 1,466 1,278 1,181 5.6 1,036 5.0 4 4.7 3.8 4.0 800 3.3 2 0 0 2013 2014 2015 2016 2017 2018 2019 Exporters (left) Share of firms (right) Source: Data from the Kosovo Customs Database and the Kosovo Tax Registry. Note: Because of lack of data, the share of firms could not be calculated for 2019. Exporting is difficult, including in Kosovo. In most countries in the world, only a small subset of firms exports. A vast body of empirical literature shows that exporting firms perform better than non-exporting firms: exporters are larger, more productive, pay higher wages, and are more capital intensive than non-exporters (Bernard and others 2007). In Kosovo, an average of just 4.4 percent of firms exported each year between 2013 and 2019. Exporting status is highly correlated with firm size (table 1). 22 Exporter Dynamics at the Firm Level Table 1.  Share of firms in Kosovo that exported between 2013 and 2019, by number of employees Number of employees Percent of firms that exported 0–9 2.9 10-49 20.9 50 or more 34.3 Exporters of goods in Kosovo are 5.5 percent more productive than nonexporters in terms of revenue-based total factor productivity (TFPR). The difference is even greater based on alternative labor productivity measures, such as value-added per worker and sales per worker (figure 16). Exporters of goods are also larger and pay higher wages. The average goods-exporting company is 118 percent larger than the average nonexporting firm and pays 15.6 percent higher wages. The fact that exporting firms pay higher wages per employee may be related to the fact that they employ more skilled workers, consistent with higher labor productivity and better performance. Sectoral characteristics do not drive these differences. The same conclusions hold if the analysis is restricted to the manufacturing sector, although nonmanufacturing companies may also export goods. Figure 16. Difference in performance of exporters and nonexporters in Kosovo 118.5 Gap between exporters and non-exporters (%) 120 100 80 71.4 60 51.4 40 20 15.6 13.4 12.0 5.5 2.9 0 Log TFRR Log value added Log sales Log Log wage Log capital Investment Credit per worker per worker employment per worker per worker access Source: Data from the Kosovo Customs Database and the Kosovo Tax Registry. Note: Following the spirit of Bernard and others (2007), the exercise regresses a selected group of firm performance measures on two dummy variables that classify firms based on their exports and on the log of employment to control for firm size. The first dummy variable equals 1 if the firm is an exporter of goods and 0 otherwise; the second follows the same logic for exporters of services. The baseline category is nonexporters.. Confidence intervals are calculated with a 95 percent confidence level as demonstrated in the graph. (see annex table A.1 for regression results). Exporters of goods are more capital intensive, are more likely to invest, and have greater access to credit than nonexporters. The capital stock per worker in exporting companies is 13.4 times higher than in nonexporters, and the share of firms investing is 12 percentage points higher. Exporters also have greater credit access at 2.9. Sectoral characteristics do not drive these differences. Exporters of goods are concentrated in the utilities, manufacturing, mining, communications, and agriculture sectors. The share of exporting firms varies across sectors. In 13 out of 19 sectors, the percentage of exporting firms is above 5 percent; in only 5 of these sectors does the share of exporters exceed 10 percent. More than 14 percent of manufacturing and mining firms and 10 percent of agriculture registered companies sell products abroad. Kosovo’s exporter density—the number of exporting companies relative to the population—is above that of countries with similar income per capita but below that of most comparator and aspirational peers. The relationship between the number of firms exporting goods (adjusted by population size) and income per capita is positive (figure 17). Kosovo’s exporting underperformance is thus not related to the density of exporters but to other dimensions of the extensive and intensive margins, in other words, in entering new markets, exporting new products to existing destinations and expanding the value of exports in the existing markets. Exporter Dynamics at the Firm Level 23 Figure 17. Correlation between number of exporters of goods per million people and GDP per capita in Kosovo and selected country groups 10 EST 9 HRV 8 MKD KOS ALB 7 R² = 0.7454 6 5 4 3 2 1 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 10.5 11.0 11.5 GDP per capita (PPP, current US$) Kosovo Comparators Aspirational peers Low income Lower middle income Upper middle income High income Source: Data from the Kosovo Customs Database and the Exporting Dynamic Database. Note: Figure shows the average number of exporting firms reported in the Exporting Dynamic Database for 2010–14 (latest period available) divided by the average population within the same period. The average for Kosovo is for 2013–19. Country-level data were available only for Albania, Croatia, Estonia, and North Macedonia. Scale of Goods Exports On average a Kosovar firm engaged in international trade exported US$200,000 a year in 2013– 19, but half of all exporting firms exported less than US$11,500. The average firm exported almost 20 times as much as the median exporter. There was considerable heterogeneity across sectors. For instance, considering the activities where there is a sufficient number of observations exporters in that activity the median exports of exporters of vegetables, food and beverages, and mineral products was three to four times as high as the economy-wide median, suggesting that Kosovo has comparative advantages in these sectors. Export performance in the remaining sectors is similar, with a median export value of less than US$15,000 per firm. Average and median exports per firm declined between 2013 and 2019, as Kosovar firms struggled to achieve sustained growth. Between 2013 and 2019, mean exports fell 30 percent and median exports fell 3 percent. Concomitantly, exporters’ average number of employees, turnover, and investments also declined during the same period.5 The decrease in average value per firm was not driven by firms entering and exiting the activity; and incumbents (defined as firms that exported in two consecutive years) also experienced a decline in mean and median exports (of 12 percent and 6 percent, respectively, between 2014 and 2018. Median exports per firm are much lower in Kosovo than in countries with similar income levels (figure 18).6 Differences in average exports are even more striking, pointing to the smaller size of exporters in Kosovo. 5 This trend is also apparent among incumbent exporters and for median values. 6 The median export value is considered more representative than the average export value, because large firms dominate exporting activity. 24 Exporter Dynamics at the Firm Level Figure 18. Correlation between median export value per firm and GDP per capita (PPP). Current US$, in logs in Kosovo and selected countries Median export value per firm (USD, logs) 14 13 12 R² = 0.0421 11 ALB HRV 10 MKD KOS 9 8 7 6 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 10.5 11.0 11.5 GDP per capita (PPP, current US$) Kosovo Comparators Aspirational peers Low income Lower middle income Upper middle income High income Source: Data from the Kosovo Customs Database and the Exporting Dynamic Database. Note: Figure shows the average export value of the median exporter per country reported in the Exporting Dynamic Database for the period 2010–14 (latest period available) and GDP per capita at purchasing power parity in current US$. Averages for Kosovo is for 2013–19. Products Sold and Destinations Served Companies in Kosovo export nearly 1,700 different products and reach 82 destinations (figure 19). The number of exported goods increased from 1,500 in 2013 to 1,700 in 2019. The fact that new companies export may also increase product diversification. The number of destinations served also rose during this period. Kosovar companies export goods to nearly 82 destinations, 40 percent more than in 2013. Figure 19. Number of products exported and destinations served by firms in Kosovo, 2013–19 500 Average (left) Median (right) 20 400 16 12.5 12.0 300 10.2 12 200 250.2 8 100 163.3 175.1 4 0 0 2013 2014 2015 2016 2017 2018 2019 Source: Data from the Kosovo Customs Database. Exporter Dynamics at the Firm Level 25 On average, Kosovar firms sold 4.4 products abroad and served 1.8 destinations. Almost 60 percent of firms export products to only one country, and 40 percent sell only one product (table 2). Nearly a third of exporting firms sell one product to one country, leaving them vulnerable to the dynamics of a single market. Exporters do not show strong linkages with trade partners. The average number of goods sold and destinations served grew 25 percent between 2013 and 2018, and multi-product, multi-destination firms dominate exporting activity. Firms that serve five or more countries and export five or more products (5 percent of total exporters of goods) account for 41 percent of the value of goods exports; companies serving one destination with only one product (36 percent of exporters) account for 8 percent of the value of exports Table 2.  Share of firms and export value by number of products exported and destinations served by firms in Kosovo, 2019 Share of firms Number of countries exported to 1 2 3 4 5+ All Number of products exported 1 35.8 3.9 1.0 0.8 0.3 41.8 2 9.8 4.9 1.3 0.2 0.5 16.7 3 3.9 2.7 1.5 0.3 0.8 9.3 4 2.6 1.7 1.6 0.6 0.7 7.1 5+ 8.0 5.7 3.9 2.4 5.2 25.1 All 60.1 18.9 9.3 4.3 7.5 100.0 Share of export value Number of countries exported to Number of products All exported 1 8.0 2.5 2.0 3.9 1.8 18.1 2 2.3 2.6 0.6 0.0 0.8 6.3 3 0.8 1.2 3.1 0.7 8.9 14.7 4 0.7 0.5 0.5 0.2 1.8 3.6 5+ 3.1 2.1 4.4 7.2 40.5 57.3 All 14.9 8.9 10.5 12.0 53.7 100.0 Source: Data from the Kosovo Customs Database. Geographical and product diversification are associated with higher productivity and a lower probability of quitting export markets (Volpe Martinicus and Carballo 2009). A 10 percent increase in labor productivity (measured by sales per worker) is associated with exporting to 1.4–1.6 to new destinations on average. More experienced firms and regular exporters (incumbents) also serve more destinations. A 10 percent increase in labor productivity is associated with exporting 4.3–6.2 more products (see annex table A.3 for regression results). Incumbents also tend to export more products compared to the average exporter]. Firms with greater geographical and product diversification are more likely to survive after entering foreign markets. Exporting companies serve fewer destinations and have a smaller export bundle than similar companies in comparator and aspirational countries. In addition to having a lower median export value, exporting firms in Kosovo shipped fewer products and served fewer destinations than the Western Balkans average; they performed even worse relative to the average country in the world. Albania and North Macedonia also underperform. Countries with higher income per capita perform better in terms of both the number of products exported and the number of destinations served (figure 20). 26 Exporter Dynamics at the Firm Level Figure 20. Average of products exported and destinations served per firm, by country 10 Destinations Products 9 8 7 6 R² = 0.3035 5 4 HRV EST 3 2 MKD 1 ALB KOS 0 0 2 4 6 8 10 12 14 16 Low income Lower middle income Upper middle income High income Comparators Aspirational peers Kosovo Source: Data from the Kosovo Customs Database and the Exporter Dynamics Database. Note: Averages for all countries except Kosovo are for 2010–214. Figures for Kosovo are for 2013–19. Determinants of Trade Relationships Many factors explain trade relationships. New trade relationships may develop through firms entering a new activity, exporting new products, or serving new destinations (the extensive margin). Exporters may also increase their exports of a given product to a specific destination (the intensive margin). The analysis on this section uses the gravity equation which measures the influence of distance, market size and other variables affecting bilateral trade flows the analysis yields several important findings: • Export value per product per firm (the intensive margin), the number of exporting firms and the number of exported products (the extensive margin) increase with the importer income level and decrease with distance. On average, a 1 percent increase in the distance to the destination market, reduces firm participation, the number of exported products, and the value traded per product per firm by more than a 1 percent decrease in import country’s income level in absolute terms. Hence, this result shows that shipment distance plays a bigger role than market size in Kosovo’s trade flows. Shipment costs and trade barriers may be limiting export growth in both margins. • More firms export to neighboring countries than to other destinations, and the number of products exported is greater. • Speaking the same language and having a Kosovar diaspora in the destination market increases trade flows. Firm participation and the number of products traded are significantly higher for the top 10 destinations of the Kosovar diaspora but exported value per product is lower than the average of countries not included in the list. • The relation between the average export value per product and speaking the same language, having a Kosovar diaspora presence, and sharing a common border is negative. This result may reflect greater market competition as a result of physical and cultural proximity or the fact that the products sold in these destinations may be cheaper, less sophisticated, of low quality, or less differentiated than other products. Exporter Dynamics at the Firm Level 27 Market Entry and Survival Entry into exporting is relatively dynamic, but export value at entry is low. Every year, an average of more than 600 firms (41 percent of the total number of exporters of goods) enters exporting and nearly 500 (35 percent) quit (figure 21). The export value at entry is relatively low, however. The median and mean export at entry averaged US$5,300 and US$30,300, respectively in 2014–18. The number of new exporters decreased over this period. Western Balkans countries and the EU serve as the first destinations of new exporters. Serbia, Albania, Switzerland, Germany, and North Macedonia were the top five destinations, pointing to the region’s importance as a platform for inexperienced exporting businesses. Figure 21. Number of Kosovar firms entering and exiting exporting activity, 2014–1 700 Entry Exit 674 678 614 625 600 547 534 505 496 500 443 437 400 300 200 100 0 2014 2015 2016 2017 2018 Source: Data from the Kosovo Customs Database. Exporting entry is greater in Kosovo than in regional peers and middle-income countries. Kosovo has the second-highest entry rate among comparator and aspirational peers. Even compared with countries outside the region, its exporting entry rate is high. The net entry rate is slightly above similar countries except Estonia (figure 22). Figure 22. Entry, exit, and net entry into exporting in selected countries 60 57.3 Entry 50 Exit 41.0 Net entry 40 38.4 36.3 36.0 36.1 33.5 32.1 32.7 33.5 30.0 29.1 30 28.2 20 10 6.0 7.5 4.9 3.9 3.6 0 Upper-Middle Albania Croatia North Macedonia Kosovo Estonia Income Countries Source: Based on Kosovo Customs Database and Exporter Dynamics Database. Note: Figures for all countries except Kosovo are for 2010–14. Figures for Kosovo are for 2014–19. Survival in international markets is challenging and positively correlated with initial export values. Less than half of exporters survive the first year after entry, and only 16 percent are still exporting in the fifth year (figure 23). New exporters in the top quintile of exporters at entry (the largest exports) are two to three times more likely to survive in foreign markets than exporters at the bottom quintile. The probability of survival declines monotonically based on export value at entry. 28 Exporter Dynamics at the Firm Level Figure 23. Fraction of new exporters surviving after entry according to the initial export value (divided in quintiles). Year 0 = entry year, percent 100 1st quintile 2nd quintile 3rd quintile 80 4th quintile 5th quintile Average 60 40 20 0 0 1 2 3 4 5 Years after entry Source: Data from the Kosovo Customs Database. The probability of surviving in international markets depends on productivity and other factors. Higher productivity is associated with a greater survival probability after entering a new market (existing exporters introducing a new product to a destination). Other factors also help firms succeed in foreign markets (Cadot and others 2011; Brooks 2006). For instance, network effects (the number of firms exporting a product to a destination); diversification of destinations (exporting the same product to several countries) and products (exporting many products to the same destination); the initial exporting scale; and firm’s product specialization are associated with higher survival probability. New FDI flows are also correlated with survival probability (see table A.3 in appendix A for the regression results). Firms that access credit are more likely to survive in foreign markets than firms that do not. After controlling for firm productivity, agglomeration, and market attractiveness measures, FDI flows, and the market size of the destination, credit access positively correlates with firm survival. Financial institutions can play a crucial role in enhancing exporting behavior. Firms that access credit are also more likely to enter new markets outside the region than firms with no credit access. In addition to improving the chances of market survival, accessing external funds is associated with a higher probability of entering new markets. New ventures have fixed and variable costs linked to market exploration, regulatory requirements, and productive processes (for example, adapting products and investing in machinery and equipment). For a given level of productivity, companies that access credit are more likely to export to markets outside the region. Firms that have already serve Western Balkan countries are more likely to enter other markets (defined as a new product–region combination [see table A.5 in annex A]) than firms that have not. The region serves as a springboard for entry into new market and new product combinations, likely by enabling firms to assess the costs of exporting and learn by exporting. Experience and information help businesses overcome the challenges exporting may pose. Younger exporters (that is, firms with less experience in foreign markets) are more likely to enter markets outside the Western Balkans than more experienced firms. This finding is similar to the one highlighted in Albornoz and others (2012). Improving the exporting environment may thus lead to market diversification in the long run. Exporter Dynamics at the Firm Level 29 Main Characteristics of Services Exporters The number of exporters of services doubled and the value of services exports tripled between 2013 and 2018 (figure 24).7 The value of services exports grew at a faster pace than the value of goods exports. Exports of services accounted for one-quarter of the registered export value reported in the Kosovo Customs Database and the Kosovo Tax Registry over this period. Figure 24. Number of firms exporting services and their export value of services, 2013–18 700 160 Exports (million US$) Firms 643 600 140 137 120 500 573 126 530 100 400 456 101 92 80 300 362 314 72 60 200 40 46 100 20 Firms (left) Export value (right) 0 0 2013 2014 2015 2016 2017 2018 Source: Data from the Kosovo Tax Registry. Note: The peak in 2014 reflects a jump in exports of transportation and storage. Wholesale and retail, transport, communications, and professional and administrative services accounted for 76 percent of total exporters of services and 92 percent of services export value. Five sectors dominated services exports the remaining activities contributed only marginally. Wholesale and retail trade accounts for one-third of total services exports, proportional to the share of firms exporting. Transportation, communications, and administrative activities contribute disproportionally to export value: Their share of value of services exports are almost twice their share in number of exporters (figure 25). Wholesale and retail trade, transport and storage, communications, and professional services contributed the most to services export growth. In 2018, services exports captured by the Kosovo Tax Registry amounted to US$137 million, up 200 percent over 2013. Almost half of the increase was explained by wholesale and retail activities, which are likely to perform other secondary service activities in addition to their main activity (commercialization of goods). Exports by firms in transport and storage, communication, and administrative services accounted for 10–20 percent of export growth each. 7 This subsection examines the characteristics of firms exporting services based on data from the Kosovo Tax Registry, which includes data on every registered firm reporting exports. The Kosovo Customs Database also includes data on exports of goods. The main advantage of the Kosovo Customs Database over the Kosovo Tax Registry is the higher level of granularity and detail of goods traded. The Kosovo Customs Database covers all transactions at the firm-product-destination-year level and the associated export value and weight. However, it includes only exports of goods, not all exporting activity. As firms selling goods abroad are recorded in both the Kosovo Customs Database and the Kosovo Tax Registry, the remaining exporters in the Kosovo Tax Registry are likely to be exporters of services. The data from the Kosovo Tax Registry capture only a small portion of services exports, because in some industries, such as hospitality or retail, it is difficult to determine whether a sale is an export, as it depends on the customer’s residence and diaspora-related tourism exports are not captured. In addition, the Kosovo Tax Registry does not provide information on the type of services exported or the destination served. 30 Exporter Dynamics at the Firm Level Figure 25. Share of exporters and value of exports in the services sector, by subsector a) Number of exporters b) Value of exports Wholesale and retail trade Transportation Manu- Wholesale and retail trade Administrative and and storage facturing 30.1 support services 32.1 11.5 8.0 11.3 Information and communication Professional, 22.7 scientific Construction Other and technical Professional, scientific and 6.9 sectors activities technical activities (E, Q, K, B, D,P, L, O, r) 6.9 15.8 5.0 Other Transportation and storage sectors 20.8 (E,Q,K, Administrative B,D,P,L, Information and communication O, r) 12.3 and support services 2.4 4.6 Construction Other services 1.8 Source: Data from the Kosovo Tax Registry. Note: Because of their small contribution to exports of services, public administration and defense, real estate activities, education, electricity, gas, steam and air-conditioning supply, mining and quarrying, financial services, health and social work, water supply, sewerage, waste management and remediation activities, and arts and entertainment are aggregated in “other sectors.” Although exports of goods and exports of services per firm are virtually identical on average, differences are apparent for exporters in the middle of the distribution. The average value of exports per firm is US$199,000 for services and US$200,000 for goods. These values differ for the 50 percent of firms in the second and third quartile of the export value distribution, however. The average firms in these quartiles exports US$3,000–US$55,000 worth of goods or services a year.8 The mean value of exports by firms in the second quartile was US$9,000, 40 percent higher than for goods exports (US$6,500). Differences are even more striking in the third quartile, where the average value of exported services was US$40,000 a year, 66 percent higher than the average exports of goods (figure 26). Figure 26. Distribution of exports of goods and services, by export value .2 Density Exporters of goods Exporters of services .15 .1 .05 0 0 5 10 15 20 Export value (log, US$) Source: Data from the Kosovo Customs Database and the Kosovo Tax Registry. Note: Figure shows kernel density using default specifications in STATA. 8 These figures represent the lower and upper bounds, respectively. Exporter Dynamics at the Firm Level 31 03 Trade Policy Trade Agreements Kosovo’s pursuit of trade liberalization is evidenced by the numerous trade agreements the country has signed over the past decade. Kosovo’s tariff code includes 10,191 tariff lines at the 10-digit level (IMF, 2021 Article IV 2020).9 Free trade agreements (whose rules apply to about 80 percent of Kosovo’s trade) provide the overall framework for regional cooperation and integration into European economic and political processes. For all other countries, Kosovo’s applies a uniform 10 percent import tariff on 79 percent of tariff lines and no tariff on the remaining lines. Kosovo is also a beneficiary of the generalized systems of preferences applied by Belarus, Japan, Kazakhstan, Norway, the Russian Federation, Switzerland, and the United States.10 The EU–Kosovo Stabilization and Association Agreement (SAA) is an important policy anchor for Kosovo. The agreement, which became effective in April 2016, provides for the harmonization of Kosovo’s legal and regulatory framework with EU law to prepare for accession negotiations. It also aims to eliminate most tariffs by 2026. In 2020, 87 percent of Kosovo’s tariff lines on imports from the European Union were duty-free. The SAA was preceded by the Autonomous Trade Measures (ATM), which went into effect in 2000. It granted duty-free access to 90 percent of goods exported to the European Union. Kosovo has been a member of CEFTA since 2016. This agreement covering the Western Balkan countries and Moldova eliminated all tariffs across member states. Nontariff barriers remain a challenge throughout the region, however. As part of CEFTA, Kosovo committed to adopting the Additional Protocol 6 on Trade in Services (AP6) to liberalize trade in several services sectors. Implementation of this framework is expected to increase intraregional services trade. The agreement also aims to facilitate e-commerce, in order to expand market opportunities for companies by reducing e-commerce costs for consumers and improving security. Another aspect of the agreement is the development of transparent rules, regulations, and trade-related information to create a conducive business environment for investment. In 2019, Kosovo concluded free trade agreements with Turkey and the United Kingdom. Turkey immediately removed import tariffs on Kosovo for all industrial and most agricultural goods; Kosovo will eliminate tariffs over a 10-year period. The agreement with the United Kingdom will go into effective in January 2021. Under the 2021–24 Common Regional Market (CRM) agreement concluded between the Western Balkan countries and the European Union in 2020, the Western Balkans agreed to create a regional trade area that supports the free movement of goods, services, capital, and people. The agreed measures aim at increasing economic growth by encouraging foreign investment and greater mobility of professionals. This initiative is part of the “Berlin Process” of boosting regional cooperation and European integration plans. In the area of trade facilitation, the agreement addresses the continuation of the green lane initiative created in response to COVID, which provides for expedited processing of medical goods and perishable items at regional borders, streamlining border controls, reducing trade costs, increasing transparency in trade, granting mutual recognition of authorized operators and certain documents, adopting common risk management approaches by border agencies, and expanding the data exchange system between customs administrations to other border controls agencies through the SEED+ system, which is in development. Kosovo has been a member of the World Customs Organization (WCO) since 2017. In 2020, it became a contracting party to the International Convention on the Simplification and Harmonization of Customs Procedures (known as the Revised Kyoto Convention), a blueprint for modern and efficient customs procedures ratified by 112 countries. The convention elaborates the key governing principles of customs administration: transparency and predictability of customs actions, standardization and simplification of the goods declaration and supporting documents, simplified procedures for authorized persons, maximum use of information technology, minimum necessary customs control to ensure compliance with regulations, the use of risk management and audit based controls, coordinated interventions with other border agencies, and partnership with the trade. Kosovo is not yet a member of the WTO; it is at an early stage of preparation for observer status. WTO accession triggers a domestic reform process in line with international rules, deepening prospects for global integration. Bringing domestic legislation and regulations into conformity with WTO agreements would necessitate a systematic overhaul, catalyzing good governance practices and adherence to the rule of law. Such conditions attract foreign investors, who can 9 Kosovo uses an integrated tariff schedule that is based on the 2017 Harmonized Commodity Description and Coding System (HS) and the EU Combined Nomenclature. 10 34 Trade Policy create jobs. Increased market access would facilitate market access by Kosovar firms. Increased openness could also lead to lower prices and higher-quality products, benefitting consumers, and boost private sector innovation and productivity. While Kosovo is at the early stages of its WTO accession pursuit, it has committed to aligning its domestic regulations with WTO agreements. For example, the government is committed to implementing the WTO Trade Facilitation Agreement (TFA), which entered into force in 2017.11 The TFA aims to facilitate the flow of trade by improving border procedures, including for the movement, release, and clearance of goods. It is a whole of government agreement, encompassing all trade facilitation stakeholders. Its full implementation could increase global trade by $1 trillion a year, by reducing trade costs by more than 14 percent for low-income countries and more than 13 percent for upper-middle-income countries. The World Bank’s annual monitoring reveals that Kosovo customs procedures are substantially aligned with those in the WTO TFA agreement. Kosovo aims to align its regulations through the upcoming Law on international trade. Services Trade Regulatory Assessment Kosovo is less trade restrictive than its peers for most services subsectors, according to preliminary data for Kosovo’s Services Trade Restrictiveness Index (STRI) from the WTO-World Bank Services Integrated Trade Information Portal.12 However, it is more restrictive than its peers in professional services. Restrictive policies include quotas on the number of foreigners allowed to work in Kosovo (mode 4), prior residency requirements for independent professionals in all sectors, and the requirement that local firms pass an economic need or labor market test before they can employ foreign nationals.13 The professional services most restricted to trade in Kosovo include legal services (host country advisory services, host country representation services, and home country law and/or third country law for both advisory and representation) and reinsurance and retrocession (reinsurance for a reinsurance firm) (figure 27). Figure 27. Kosovo Services Trade restrictiveness index, by services subsector, 2020 60 43.6 43.6 41.2 40.2 39.5 39.9 38.8 38.5 38.0 40 33.8 30.9 28.1 26.6 24.8 23.0 20 0 Professional Telecommunications Distribution Financial Transport Kosovo Structural Aspirational Source: WTO–World Bank Services Integrated Trade Information Portal. http://i-tip.wto.org/services/SearchApplied.aspx 11 CEFTA introduced the Additional Protocol 5 (AP5) on Trade Facilitation, essentially a regional “mirror” of the TFA, in 2018, as an additional package of measures to be undertaken by each country to further simplify and harmonize trade procedures. The AP5 goes beyond the TFA by encouraging the mutual recognition of documents and procedures within Western Balkan countries and aligning legislation and procedures with those of the European Union. AP5 focuses on border cooperation, the exchange of data, risk management, and transparency. Kosovo is the only country in the region that has not ratified this agreement. 12 The STRI for several countries is being expanded from the five sectors discussed in this report to nine. The STRIs shown here may thus be subject to revision. 13 There are certain exclusions from annual quotas, such as teachers who teach languages of minorities and or foreign employees who work in foreign companies that have a commercial presence in at least three countries. Trade Policy 35 04 Policy Options for Increasing Export Growth in Kosovo Creating an enabling environment for firms is a necessary condition for boosting exports. Improving productivity is key to competing in international markets. A conducive business environment is key to improving productivity. Management quality and innovation in processes and products also drive higher productivity. Reducing the Administrative Burden on Firms Kosovo has made great progress in improving investment climate indicators.14 Gaps remain, however. Constraints that hold back firms relate to dealing with construction permits, obtaining electricity, registering property, enforcing contracts, and resolving insolvency. The authorities are also working on improving Kosovo’s business inspections regime. Implementing the inspections law should be a priority to reduce the administrative burden on firms and improve the effectiveness of inspections. Continuously monitoring and streamlining the licensing and permitting requirements should also be a priority. Investing in Skills Improvements in export performance, access, and quality are closely linked with upgrading the skills of firms and workers. In Kosovo, the quality of education is low, and skills mismatches make it difficult for firms to hire the employees they need.15 Inadequate investment in employee and managerial training also limits life-long learning opportunities.16 There is a need to improve human capital skills by matching technical and vocational education and training (TVET) curricula to firm demands, strengthening the general education system to improve basic numeracy and literacy skills, and incentivize management and organizational practices (by, for example, providing training and technical assistance to MSMEs). Equipping students with digital skills is crucial to effecting the digital transformation of Kosovo. Improving Access to Finance Access to finance improved over the last few years. Establishing and further capitalizing the Kosovo Credit Guarantee Fund, introducing private bailiffs, and extending the joint registration of property period all helped improve access to finance. Access remains low, however, with only a third of registered firms having access to finance. Goods exporters have greater access to finance than nonexporters and service exporters. However, overall access to finance in Kosovo remains low, only one third of registered firms had accessed finance, compared with the peers and is poorly correlated with firm productivity. Improved access to finance would not only improve access to international markets, it would also increase survival of exporters. Expanding the role of microfinance—including by improving the legal framework, ensuring security of property rights by completing cadastral reconstruction, and increasing women’s access to finance—are crucial to boost productivity and access to international markets. Attracting and Retaining More Foreign Direct Investment Firms in sectors in which there is FDI in Kosovo are more likely to export; they are also more productive than other firms and were more resilient to the COVID-19 shock. Improving the business environment and ensuring the rule of law are necessary conditions for attracting and retaining more FDI. Enhancing investor services by empowering KIESA and improving after-care services are also important.17 14 In 2019, the government adopted a program to better monitor and reduce the administrative burden on firms. 15 See Enhancing Human Capital background note for a more detailed discussion. 16 See Increasing Firm Productivity background note for a more detailed discussion. 17 See Boosting Foreign Direct Investment background note for a more detailed discussion. 38 Policy Options for Increasing Export Growth in Kosovo Reducing Infrastructure Gaps and Ensuring Affordable, Reliable, and Sustainable Use of Energy Supply Kosovo’s road network should be further improved to facilitate transport through commercial cargo trucks; the country’s international rail links are also insufficient. Allocating sufficient resources to the maintenance of roads, investing in regional roads, and upgrading Kosovo’s international rail link would support more exports. Firms, particularly MSMEs in the tradable sector, incur significant costs variations in the tension of electrical supply. To avoid these costs, MSMEs pay a premium to obtain preferential supply status. The cost of accessing the power grid is a significant barrier for companies. Though the energy supply constraints have become less binding before the pandemic, they continue to be an important obstacle for the businesses. Business associations highlight the excessive number of procedures, the time to comply with them, and the high fees for accessing the power grid as onerous costs for companies, especially MSMEs. As the World moves toward sustainable resources for energy, including the EU, Kosovo will need to diversify its energy supply into renewable energy. The EU Carbon Border Adjustment (CBAM) will directly impact Kosovo’s exporting performance. The July 2021 EU CBAM legislative proposal applies to the import of selected goods from the most emission intensive and trade exposed sectors covered by the EU’s Emissions Trading System (EU ETS), such as electricity, base metals and minerals.18 The EU CBAM was designed to have a targeted and limited impact, but what comes next could be a game changer (World Bank Regular 2021c). Though the overall impact may not be immediately large, some of the manufactured goods exported to the EU could be significantly affected. However, the EU is likely to expand the CBAM to cover more sectors and more products. Hence, diversifying into renewable energy sources will become particularly important both due to the CBAM and to ensure adequate energy supply. In the low carbon transition, displaying carbon competitiveness in the production processes will remain vital. The government is working on a new energy strategy and a concept document to introduce a competitive mechanism to increase renewable energy sources while continuously investing to improve energy efficiency. Advancing reforms to diversify and increase the reliability of energy sources is crucial for Kosovo’s development. Being able to demonstrate product and services quality (through standardization, accreditation, metrology and conformity assessment) in line with internationally recognized standards is essential for developing and reaping the benefits of competition in accessing foreign markets. Kosovo has adopted adequate legislation and has the institutions needed to support a national quality infrastructure (QI) but implementation remains inadequate. 19 Some MSMEs in Kosovo are using international standardization for their products and processes. However, business associations’ lack of comprehensive QI makes it difficult for MSMEs to improve their product base and access foreign markets. Addressing Trade Facilitation and Logistics Gaps Kosovo has adopted various trade facilitation reforms over time. It reduced the number of documents required by customs during border procedures; it implemented the ASYCUDA World Customs Processing system, which made possible the online submission and processing of all import, export, and transit documentation, and payment of duties, taxes, and fees. It established paperless cargo clearance processes. Further improvements, described in the following sections, are still possible. Establishing a national single window A single window allows traders to meet all regulatory obligations (licenses, permits, certificates other authorizations) related to import or export through a single-entry point and online. A national single window would increase integrity and transparency and save resources of both the government and traders by making these processes more effective and efficient. It would reduce the time for clearance of goods, make the application process more predictable, and reduce opportunities for interpretation of laws and regulations, cutting costs by reducing delays and informal payments. 18 The proposal stipulates that, from 2026, EU importers of these goods will be required to buy carbon certificates related to the carbon price that would have been paid, had the goods been produced in the EU under the EU ETS. The price of these certificates will gradually approach full EU ETS price over 10 years, as free allowances in EU are phased out by 10 percent a year. Once non-EU producers show that they have already paid for the carbon used in the production of the imported goods, the corresponding cost can be fully deducted for the EU importer. 19 National Quality Infrastructure (NQI) in 10 Questions, World Bank internal assessment. Policy Options for Increasing Export Growth in Kosovo 39 Ensuring collaboration across customs administrations Kosovo has demonstrated its readiness to collaborate closely with other customs administrations on cross-border controls and procedures, but not all the transit and trade facilitation initiatives are fully functional. At the Vermica–Morina crossing with Albania, for example, there are significant time savings thanks to controls of cargo by the incoming side only. However, the border is supposed to have joint controls, which have not been operationalized. Also, in 2019, Albania and Kosovo signed an agreement that enabled Kosovo Customs to open an office and deploy officers at the Albanian seaport of Durres, in order to process in the Kosovo ASCYUDA system ocean freight that transited through Albania with a final destination in Kosovo. Goods already processed in this manner in Durres would then not be stopped at the land border between Albania and Kosovo. However, to date, trucks coming from Albania still have to proceed to an inland terminal in Kosovo for clearance. Based on an agreement concluded between Kosovo and Serbia in Washington, DC, in 2020, the Serbian customs authorities have moved into the Kosovo customs building at the border crossing in Merdare to improve trade facilitation at the border. Although both customs authorities are working under one roof, they carry out their controls separately. Consolidating information on trade facilitation Information on trade facilitation is published and available on-line, but it is not always up to date, consolidated, or easy to find. Primary and secondary legislation as well as international agreements are all published in the Official Gazette in a timely manner. However, secondary information on standards, operating procedures, processes, and related issues are usually published on individual institution websites, which may not be updated regularly and can be difficult to find. Creation of a single trade information portal as a single-entry point for trade-related information would help inform private companies on import/export procedures and requirements.20 Establishing a risk unit in the Kosovo Food and Veterinary Agency The Kosovo Food and Veterinary Agency (KFVA) lacks a risk unit. A risk-based sampling framework and guidelines for products of animal origin has been in force at all terminals in Kosovo since 2018. Implementation of uniform risk-based approach inspection across all sanitary and phytosanitary departments, including phytosanitary inspections, will require a well-structured and functional risk unit.21 Updating the latest time release study The TFA encourages its members to implement time release studies to measure the efficiency of border control and clearance procedures and identify opportunities for improving the process. Kosovo implemented its first-time release study in 2016, at border posts with Albania, North Macedonia, and Serbia. The study is currently being repeated with support from the World Bank. Some of the recommendations made in the first report, such as introduction of an authorized economic operator program, have been implemented; others, such as aligning the working hours for border agencies, have not.22 Abolishing the terminal fee Kosovo has 10 inland customs terminals, all privately owned. They impose a ¤40 fee on every truck that enters the terminal. All trucks carrying goods for export or import are required to pass through the terminal before they go to the trader’s premises, except for those under simplified procedures or the authorized economic operator regime. The fee adds the traders’ cost of doing business and is not in line with best practices. It disproportionately burdens smaller firms, which lack the business volume and resources of larger firms to absorb such costs. This fee should be abolished. 20 TFA Article 1.1 and 1.2 “Published Information/Information Available through the Internet” 21 TFA Art. 7.4. “Risk Management 22 TFA Art. 7.6. “Average Release Times 40 Policy Options for Increasing Export Growth in Kosovo Increasing Regional Market Access for Kosovar Exporters The region is an entry point for exporting by Kosovar firms. CEFTA eliminated tariffs across member states,23 but nontariff barriers remain a challenge for exporters.24 Improving regional integration could benefit Kosovar exporters. Reducing technical barriers to trade in the region The top constraints are lengthy customs procedures for import and exports and technical barriers to trade associated with the nonrecognition of Kosovo’s independence by three members of CEFTA (Serbia, Bosnia and Herzegovina, and Moldova), which increase the cost of transport and limit access. Certificates and testing reports are not mutually recognized in the region. For example, Kosovo producers are not able to export wine to Serbia in bottles, because the authorities do not recognize products labeled “Made in Kosovo.” The same issue arises for many other products. Eliminating restrictions to services trade There are only limited restrictions to services trade in Kosovo, most of them in professional services. Professional services are an important input into other sectors in the economy: Allowing non–EU professionals with non–EU licenses to practice foreign and international law in Kosovo, increasing foreign ownership shares of auditing services, and allowing the cross-border supply of auditing services could improve productivity. Easing restrictions to the temporary movement of skilled workers where there is a shortage by exploring guest worker programs and allowing services growth sectors to enter into direct agreements with the government to fill any labor shortages could also support export growth in the short term. 23 In 2018, the government imposed a 100 percent ad valorem import tariff on products from Bosnia and Herzegovina and Serbia. In April 2020, the caretaker government then in power lifted those tariffs and introduced gradual trade reciprocity measures. These “reciprocity” measures were revoked in June 2020. 24 According to the Kosovo Ministry of Trade, CEFTA countries, particularly Serbia and Albania, are responsible for the vast majority of nontariff barriers faced by producers and exporters in Kosovo. Policy Options for Increasing Export Growth in Kosovo 41 05 Spotlight - Digitalization and Digital Trade Digital technologies are continuously transforming the way businesses operate, innovate, provide services, and remain relevant and viable in the global marketplace. They are changing processes, models and inducing cultural and organizational changes at firms. The World Bank’s Europe 4.0: Addressing the Digital Dilemma report (Hallward-Driemeier and others 2020) shows that leveraging digital investments and accelerating the use of digital technologies can promote competitiveness, market inclusion, and geographic convergence.25 The use of digital technologies such as e-commerce platforms can facilitate access to larger markets at very low cost, helping smaller firms, including firms in remote locations, become more productive. Increasing the use of digital technologies can play an important role in shaping Kosovo’s recovery from the pandemic. Kosovo’s private sector is dominated by mostly domestic market oriented MSMEs. Better use of digital technologies and platforms could boost trade. With almost universal broadband infrastructure, a young population, relatively low labor costs, and proximity to a large and affluent EU market, Kosovo has the ground conditions for scaling up exports by building a digital economy. The COVID-19 pandemic accelerated the need for this transformation and underlined the importance of leveraging digital connectivity. In Kosovo, the percentage of firms that used online sales soared from 8 percent in June–July 2020 (the first wave of the pandemic) to 55 percent in July–August 2021 (the second wave), according to the World Bank’s Business Pulse Survey. Companies that were able to adopt digital solutions, leverage online sales, and move to remote work were better able to adapt to the pandemic environment. Firms that were better prepared digitally before the pandemic were less likely to fall into arrears and more likely to expect improvement in sales during the second wave. This section focuses on e-commerce, defined broadly as the sale of goods and services facilitated by the Internet. It reviews the state of digital connectivity, e-payments, and the regulatory framework for digital trade, identifying constraints and providing actionable recommendations for creating an enabling environment for e-commerce.26 The recommended actions have the potential to bring benefits beyond the e-commerce sector, including digital and financial inclusion. The State of the E-Commerce Sector in Kosovo The size of Kosovo’s e-commerce sector is unknown, but survey data suggest that it is growing. The number of Kosovars purchasing or ordering goods and services for private use via the Internet is constantly increasing. The percentage of people ordering a good or service over the Internet in the three months before being surveyed rose from 16.9 percent in 2018 to 35.4 percent in 2020, and the number of people who had never ordered online dropped from 63.6 percent to 43.1 percent (figure 28). Most e-commerce customers ordered from domestic firms (figure 29). Figure 28. Use of the Internet for ordering goods and services in Kosovo, 2018–20 70 63.6 2018 59.1 2019 60 50 2020 43.1 40 35.4 30 22.7 20 16.9 10.2 7.9 10 5.3 7.4 2.7 1.8 0 Within the last 3 months Between 3 months and More than 1 year ago I never bought or ordered a year ago Source: Data from the Kosovo Agency of Statistics. 25 The report focuses on three types of process technologies: (a) transactional technologies that help better match supply and demand, in order to facilitate market transactions by lowering information asymmetries (examples include digital ecommerce platforms and blockchain); (b) informational technologies that exploit the exponential growth of data and the reduced cost of computing (examples include business management software, cloud computing, big data analytics, and machine learning); and (c) operational technologies that combine data with physical automation to reduce production costs, including the costs of labor, materials, and energy (examples include smart robots, 3D printing, and the Internet of Things). Differences in the economic drivers of technological change imply different degrees of diffusion or concentration of opportunities. For further details, see Hallward-Driemeier and others (2020). 26 These three areas form the backbone of an e-commerce assessment. However, a full digital readiness or e-commerce diagnostic covers additional areas. 44 Spotlight - Digitalization and Digital Trade Figure 29. Source of goods and services consumers in Kosovo purchased over the Internet, 2018–20 40 2018 34.5 35 2019 30 27.0 2020 25 20 18.0 15 10 5.0 5 1.7 2.8 1.6 2.9 1.6 0.8 0.2 0.4 0 From Kosovo From other EU countries From the rest of the world Unkown origin Source: Data from the Kosovo Agency of Statistics. These results are consistent with international trends, as the pandemic forced many customers to switch to online options in 2020 in order to reduce the risk of infection and comply with mobility restrictions. In Poland, for example, e-commerce sales in in April 2020 were twice as high as they were in April 2019 (ccinsight.org). A key constraint for online sales is lack of trust in online shopping. An online World Bank survey of Kosovar e-commerce users conducted in 2020 revealed that the most important concern (expressed by 78 percent of respondents) was the product would not meet their expectations and would be difficult to return. The second-most cited concern, expressed by 52 percent of respondents, was identity or payment fraud. High tax and customs duties were the third-most important constraint (figure 30). Figure 30. Concerns of Kosovars about shopping online, 2020 Risk that product does not meet expectation and di cult to return Risk of identity or payment fraud High tax/customs duties Inconvenient/unreliable delivery High delivery cost Lack of access to a payment method accepted by the seller High payment cost (examples: card fee, transfer fee, unfavorable… Delivery not available Other Lack of language skills to shop from an international website 0 10 20 30 40 50 60 70 80 90 Source: World Bank online e-commerce survey 2020. Note: Multiple responses were allowed. Firms’ adoption of digital technology accelerated during the pandemic. During the first wave of the Business Pulse Survey conducted in June-July 2020 only 11 percent of firms reported having increased their use of digital technologies; during the second wave, conducted in July-August 2021, 46 percent of firms reported doing so. Significant differences are evident between micro and large enterprises in increasing the use of digital technologies, suggesting a widening digital divide during the pandemic (figure 31). Spotlight - Digitalization and Digital Trade 45 Figure 31. Firms reporting increasing use of digital technologies, by firm size 91 Wave 1 Wave 3 80 74 60 49 40 36 32 27 20 17 5 0 Micro (0-4) Small (5-19) Medium (20-99) Large (100+) Source: World Bank Business Pulse Survey. Online sales continued to increase in Kosovo even after mobility restrictions were relaxed. About 63 percent of services firms offered online sales in June–July 2021, up from 8 percent at the onset of the pandemic. Half of retail firms were offering online sales in June–July 2021 (figure 32). The share of online sales by MSMEs remained low, though they could have benefitted more from plugging into a larger market. Figure 32. Use of online sales, by sector and firm size, April 2020 and June-July 2021 a) Sector b) Firm size 80 59 Prob. of having online sales 60 Share of online sales 70 63 50 60 50 40 50 40 30 31 30 20 20 13 12 11 9 8 10 7 10 3 2 1 0 0 Manufacturing Retail Other Services Small (5-19) Medium (20-99) Large (100+) Micro (0-4) Source: World Bank Business Pulse Survey. Digital Connectivity Widely available and affordable access to high-speed Internet is a prerequisite for the digital economy, especially e-commerce. Ensuring comprehensive coverage, good quality, and affordable prices of digital services across regions is essential, particularly for firms in the rural areas, not to fall behind in digital transformation. Affordable access to quality Internet is also important for Kosovo’s MSME dominated private sector as well as for customers and citizens to be able to shop online, and access services. This section reviews the state of digital connectivity in Kosovo and identifies needed reforms of both fixed and mobile networks.27 27 The chapter builds on many reports and sources of data on the digital connectivity challenges faced in Kosovo, especially the ongoing Digital Economy project data, implemented by the Ministry of Economy, and regular market reports of the sector regulator. It also synthesizes work ongoing under the World Bank Digital Highways project. 46 Spotlight - Digitalization and Digital Trade Affordable broadband Internet services is broadly available across Kosovo, but several challenges remain. Fixed broadband coverage in Kosovo is the highest in the region. It is relatively affordable. Wide differences exist in broadband connectivity across municipalities, however, and the speed is low. Both the coverage and the share of 4G technology lag the region; because of its cost relative to disposable income, high-speed broadband Internet (30 megabits per second [Mbps]) remains a niche product. Lack of connectivity, hardware, and ICT classes at schools limit young people from realizing their potential and preparing for the digital economy. Alleviating these constraints require actions at the international, regional, and national levels: • A mixture of private and public sector solutions is needed to plug Kosovo more broadly into international Internet backbones. • Although significant progress has been achieved in expanding rural coverage, thanks to the measures taken since 2019, reducing inequality of access across municipalities requires improving the take-up of the matching grant scheme and closing infrastructure gaps.28 • Kosovo needs to improve spectrum management to boost the mobile broadband market and put in place the basis for 5G technology. • Providing education and health facilities with broadband connectivity remains essential, especially in the COVID-19 context. Fixed broadband Average Fixed broadband penetration in Kosovo is greater than in both peer countries and the European Union. At the end of December 2020, average fixed broadband penetration stood at 129 percent of Kosovar households, driven by high coverage rates in rural areas (figure 33). 29 Average fixed broadband penetration in the Western Balkans stood at 83 percent of households (74 percent without Kosovo) at the end 2020 and 78 percent in the European Union in 2019. Figure 33. Average fixed broadband penetration in selected countries, 2020 Kosovo 129 Greece 96.4 US 92.6 Montenegro 89.5 Germany 86.5 North Macedonia 81.3 Serbia 71 Croatia 70.2 BiH 68.9 Italy 68.6 Turkey 67.6 Austria 63 Albania 58 Moldova 48.6 0 50 100 150 Source: Telegeography and ARKEP 2020. 28 To overcome digital inequality across regions—a problem that exists virtually everywhere in the world—in 2018 the government set up a matching grants scheme that co-finances infrastructure investments in rural areas. Since becoming operational, in 2019, the scheme has provided €4.5 million in matching grants and raised ~€4 million in private investments from 18 ISPs across Kosovo. The program has connected 147 villages to future- proof broadband service, bringing 4,067 households, 75 schools, and 26 health institutions online. 29 Penetration can exceed 100 percent because broadband subscriptions include subscriptions from SMEs and public institutions, in addition to households. Spotlight - Digitalization and Digital Trade 47 The retail broadband services market is competitive, with almost 40 active Internet Service Providers (ISPs).30 The Electronic and Postal Communications Authority (ARKEP) provides continuous oversight of competition and end-user rights.31 Although there are no immediate concerns about competition, market analysis could help identify and prevent anticompetitive practices and identify challenges, including challenges unrelated to competition, such as difficulties with network deployment. Although penetration is high nationally, it is uneven across municipalities, ranging from 0.08 percent of households in Zveçani to 285 percent in Fushë Kosovë (figure 34). Smaller municipalities have made more progress than larger ones. Figure 34. Fixed broadband penetration in Kosovo, by municipality, fourth quarter 2020 Population, number Fixed broadband households penetration, % 250,000 300% 250% 200,000 200% 150,000 150% 100,000 100% 50,000 50% 0 0% Prishtina Prizreni Ferizaji Peja Gjakova Podujeva Mitrovica Gjilani Vushtrria Drenasi Suhareka Rahoveci Lipjani Malisheva Skenderaji Vitia Deçani Istogu Klina Fushë Kosova Kaçaniku Dragashi Kamenica Shtime Obiliqi Leposaviqi Graçanica Han i Elezit Zveçani Novoberda Shterpc Zubin Potoku Juniku Mamusha Ranilugu re Kllokoti i Parteshi Source: ARKEP 2020. Eliminating digital inequality by reducing costs to broadband deployment in rural areas has been a government priority since 2018. One-off connection costs per household vary greatly depending on the geographical location even within rural areas, as a result of differences in population density and terrain. For instance, connection costs per household are ¤6,100 in Podujeva, ¤378 in Gjakova, and ¤40–¤50 (for an apartment) in Pristina.32 Connections in urban areas are much cheaper at about EUR 40-50 for an apartment in Pristina. These differences in investment conditions resulted in market failures across many rural areas in Kosovo depriving them from infrastructure investments and leaving the population in a digital blackout. To overcome digital inequality across regions, the government of Kosovo set up a matching grants scheme with the objective to co-finance infrastructure investments in rural areas in 2018.33 After becoming operational in 2019, the scheme has provided EUR 4.5 million in matching grants and raised ~ EUR 4 million in private investments from 18 different Internet Service Providers (ISPs) across Kosovo. Since then, 147 villages were connected to future-proof broadband service bringing online 4,067 households, 75 schools and 26 health institutions. Creating a digital economy requires improving the digital connectivity of schools. Connectivity of schools and healthcare facilities remains limited. According to the Ministry of Education, Science, Technology, and Innovation, 125 schools (11 percent of all schools) are not formally connected to the Internet. However, majority of connected schools use Internet services for administrative rather than educational purposes, as only administrative offices have access to the Internet. Additionally, about half of all public schools in Kosovo offered dedicated computer (ICT) class, and there was one computer per 37.5 students available in public schools in Kosovo, far fewer than in other countries in the region.34 30 The Herfindahl-Hirschman Index is approximately 1,810, suggesting strong competition. 31 For a full list of sector stakeholders, see annex table B1. 32 See https://public.tableau.com/profile/basani.club#!/vizhome/GrantAnalyze21-02-03/4-Privateinvestments. 33 34 See Enhancing Human Capital background note for further details. 48 Spotlight - Digitalization and Digital Trade Speeds remain low for both fixed and mobile internet connections, with respective mean values of about 44 and 27 Mbps for downloads and 10 and 9 Mbps for uploads in October 2021.35 The highest mean download and upload speeds for fixed broadband in the region were in Serbia (49 Mbps download) and Montenegro (15 Mbps upload) (figure 35). Figure 35. Mean fixed and mobile broadband download and upload speeds, October 2021 a) Fixed Download speeds b) Fixed Upload speeds North Macedonia North Macedonia Albania Albania Serbia Serbia Montenegro Montenegro Bosnia and Herzegovina Bosnia and Herzegovina Kosovo Kosovo 0 20 40 60 0 5 10 15 20 c) Mobile Download speeds d) Mobile Upload speeds North Macedonia North Macedonia Albania Albania Serbia Serbia Montenegro Montenegro Bosnia and Herzegovina Bosnia and Herzegovina Kosovo Kosovo 0 20 40 60 0 5 10 15 20 Source: Based on Speedtest, Ookla, https://www.speedtest.net/global-index Poor international interconnectivity drives the low quality of broadband connections in the region. With three landlocked countries, the region lacks access to international submarine cables, which form the global Internet backbone network. The lack of sufficient international connectivity services raises the cost of broadband packages in Kosovo.36 Other reasons driving low quality of mobile connections such as insufficient spectrum assignments are discussed in the next sub-section. 35 See https://www.speedtest.net/global-index/kosovo. 36 This finding is based on interviews with ISPs in the first half of 2021 and GEANT (the pan-European data network for the research and education community) in 2020. GEANT was attempting to establish a point of presence in Kosovo to provide access to the Research and Education Network (KREN). It abandoned the plan because of insufficient international connectivity. Spotlight - Digitalization and Digital Trade 49 Basic fixed broadband connections are relatively affordable, but most Kosovars cannot afford top-of-the-line high-speed Internet. The cost of high-speed broadband Internet is the highest in the Western Balkans; as a share of income, it is higher in Kosovo than in some regional peers (figure 36).37 Figure 36. Price of high-speed fixed broadband as share of monthly disposable income for bottom 40 percent of the population, 2020 Albania 44 North Macedonia 22 Kosovo 20 Montenegro 19 Serbia 17 Bosnia and Herzegovina 13 0 10 20 30 40 50 Source: World Bank staff analysis. Note: The affordability analysis considers in each country 30 Mbps and comparable cheapest public high-speed fixed broadband service packages (excluding promotions) from the biggest ISPs whose cumulative consumer market share is above 50 percent, March, 2020. Mobile connections Kosovo had an estimated 1.8 million mobile subscribers at the end 2020, a per capita penetration rate of about 100 percent (ARKEP 2020). Together with North Macedonia, it has the second-lowest mobile subscription penetration in the region (figure 37, panel a). As a share of all connections, 4G connections are lower in Kosovo, Bosnia and Herzegovina, and Serbia than in other countries in the region (figure 37, panel b). Advancement on this front is important, as 5G networks will be deployed using 4G infrastructure. Figure 37. Mobile connections in Western Balkan countries, 2020 a) Mobil connections per capita b) 4G connections as percent of all connections Montenegro 172 North Macedonia 83 Serbia 119 Albania 79 Bosnia and Herzegovina 107 Montenegro 72 North Macedonia 101 Kosovo 54 Kosovo 100 Bosnia and Herzegovina 43 Albania 91 Serbia 42 0 50 100 150 200 0 20 40 60 80 100 Source: Telegeography Globalcomms database. 37 Affordability standard is set at 2% of monthly disposable income by the United Nation’s agency for telecommunications International Telecommunication Union (ITU) 50 Spotlight - Digitalization and Digital Trade Ensuring competition in the mobile market is essential given the limited market size. Kosovo has two major mobile network operators (MNOs). Both run 3G and 4G mobile networks, with 4G available mostly in the urban areas and along major transport corridors. At the time of drafting this report, the 3G signal covered 98 percent of the population.38 For 4G connections, IPKO covers 87 percent of the populated territory, and Telekom Kosova (TK, operating under the Vala brand) covers 85 percent.39 Given the limited market size, it is unlikely that an additional national MNO will find it commercially attractive to enter the market. Thus, the risk of a duopoly needs to be mitigated.40  Competitive pressure from mobile virtual network operators (MVNOs) should be pursued. Introduction of MVNOs requires regulation of the national mobile call origination market. Lack of such regulation may explain the mixed experience of MVNOs in Kosovo.41 Limited radio frequency spectrum constrains development of the mobile network. MNOs in Kosovo have just half the spectrum resources available to the operators in the European Union countries and significantly less than in neighboring countries (figure 38). At the same time, the amount of unassigned spectrum in Kosovo is high (figure 39). With little or no assigned spectrum at 800 MHz, 2.1 GHz, and 2.6 GHz, it is technically impossible to provide good-quality mobile broadband services. Figure 38. Radio frequency spectrum assigned to mobile network operators in Western Balkan countries, 2019 KOS 46 120 20 20 206.4 BIH 68 92 90 250.4 MKD 60 30 130 50 270 BGR 70 150 90 310 SRB 60 50 140 90 340 HRV 60 70 150 90 370 ALB 68 148.8 90 80 20 406.4 ROU 50 70 150 120 60 20 465 MNE 60 70 150 100 120 5 50 555 0 100 200 300 400 500 Bandwidth (MHz) 700MHz 800MHz 900MHz 1500MHz** 1800MHz 2100MHz 2300MHz 2600MHz 2600MHz* 3500MHz Source: ARKEP 2019. 38 Data are from the Telegeography GlobalComms Database, accessed in May 2021. 39 As part of a EU–brokered deal between Serbia and Kosovo, in December 2016, ARKEP issued a limited, temporary license to a third MNO, a local subsidiary of Serbian state-owned full-service provider Telekom Srbija, which operates under the MTS brand. 40 Market shares—measured by the number of subscribers—are as follows: TK: 59.5 percent; IPKO: 39.8 percent; MTS: 0.7 percent (ARKEP 2020). With a Herfindahl-Hirschman Index of 4,513, the mobile market is quite concentrated. 41 Two VMNOs were established by existing MNOs and, therefore, are not contributing to efficient competition; a third (ZMobile), which operated over TK’s network, withdrew from the market after a dispute with TK that resulted in arbitrage proceedings and eventual losses for TK. Spotlight - Digitalization and Digital Trade 51 Figure 39. Assigned and unassigned spectrum in Kosovo in relevant bands 400 Bandwidth (MHz) 350 Mobile Network 340 Operator 300 Military use 250 Unassigned 200 150 60 100 80 27.6 50 120 15 2.4 90 60 40 35 60 35 0 20 800 MHz 900 MHz 1800 MHz 2100 MHz 2 GHz* 2.6 GHz 2.6 GHz* 3.6 GHz* Source: ARKEP 2019. Note: The 3.6 Ghz spectrum is TDD (Time Division Duplex) mode; all other frequencies are FDD (Frequency Division Duplex) mode42. Demand for mobile data continues to rise, increasing the need for more spectrum. Spectrum is available in most of the relevant bands for assignments to MNOs, including the bands mentioned above and the bands designated for 5G technology, such as 3.4–3.8 GHz. ARKEP, the agency responsible for radio spectrum management in Kosovo, has developed a frequency release plan that includes three phases.43 Implementation of the first phase which renewed existing spectrum licenses of Vala and IPKO was completed in 2019; implementation of the second phase which supposed to assign spectrum in 800 MHz, 900MHz, 1800MHz, 2.1GHz and 2.6GHz frequency bands, has been delayed since 2019. Under the third phase spectrum assignments are planned to support 5G technology rollout.44 These delays are holding back the development of mobile communications in Kosovo. The affordability of mobile broadband in Kosovo is comparable to the Western Balkans average, but it is costly relative to incomes. Mobile broadband subscriptions cost about 18 percent of the disposable income of the bottom 40 percent of the population in Kosovo. This share is slightly more than in North Macedonia (21 percent) but significantly larger than in Serbia (5 percent) (figure 40). Figure 40. Cost of mobile broadband as percentage of disposable income of bottom 40 of the population in Western Balkan countries, 2020 Serbia 4.97 Bosnia and Herzegovina 9.78 Albania 12.89 Montenegro 17.2 Kosovo 18.88 North Macedonia 21.06 0 5 10 15 20 25 Cost of mobile broadband as a percent of disposable income Source: World Bank staff analysis. Note: Figures is based on analysis of the least expensive (basic) mobile Internet offerings of the top three MNOs by market share as of March, 2020. Income consumption per decile data are from PovcalNet (http://iresearch.worldbank.org/PovcalNet/povOnDemand.aspx). Data on population and PPP conversion rate are from the World Bank Open Data indicators. Data on market shares from Albania are from GlobalComms Database, TeleGeography. 42 TDD and FDD are spectrum usage techniques used in broadband wireless communication systems. 43 http://arkep-rks.org/repository/docs/Plani%20per%20hapjen%20e%20brezeve%20-%20Final%20dt%20 08052019%20publikim%20(1).pdf 44 Third phase will cover three frequency bands: 700 MHz, 3.4-3.8 GHz and 26 GHz 52 Spotlight - Digitalization and Digital Trade The strong presence of fixed networks in rural areas could improve mobile broadband connectivity across Kosovo. Traditionally, mobile towers serving rural areas are connected to the rest of the network via dedicated wireless backhaul links. Those wireless backhaul links have limited transmission capacity which in turn limits capacity which can be offered to mobile subscribers. Transition to 4G and especially 5G urgently requires replacement of wireless backhaul equipment with fiber connections from the core network all the way down to the mobile towers, without which the transition cannot be supported. Following remarkable achievements in the deployment of rural infrastructure, Kosovo amended its matching grants scheme, which now also supports investments to improve connectivity to mobile towers in rural areas. Both PTK and IPKO were awarded grants through the scheme.45 Recommendations for establishing the foundations for promoting the digital economy The new strategy – Digital Agenda 2030- offers an opportunity to address broader sectoral challenges in using digital infrastructure and developing the latest technologies. In preparing the new strategy, the ministry should assess the implementation of the previous strategy, which attempted to promote digital skills and adoption of the Internet by public institutions. An analysis of the implementation of the previous strategy should inform preparation of the new strategy. The ministry should also expand the notion of digital connectivity to include data infrastructure, with a focus on security and environmental sustainability. The EU Digital Decade46 calls for expanding digital connectivity that is both secure and sustainable. Kosovo previous strategy, which focused on broadband connectivity (the main challenge of the time), did not focus much on either. The environmental impact of the digital footprint should be considered an important part of Kosovo’s digital strategy, as data infrastructure (such as data centers) are among the fastest-growing contributors to global energy consumption. Digital infrastructure is responsible for 3,7 percent of global greenhouse gas emissions47. Enabling private Internet service providers to expand their network coverage on a commercial basis is key to increasing coverage and providing good-quality services at affordable prices. Key measures could include the following: • Ensure effective implementation of the recently adopted Law that transposes the EU Directive EU/61/2014, which aims to reduce the costs of broadband deployment, and ensure its effective implementation.48 This requires developing and implementation of the secondary legal acts addressing inefficiencies in dispute settlements related broadband infrastructure deployment as well as transparency and coordination of civil works among others. • Conduct a detailed review of the process for constructing fixed broadband networks, in order to reduce the administrative burden. In the context of the 5G rollout, the government could review existing procedures to identify measures that would reduce the administrative burden of building new networks. • Continue to closely monitor existing cross-sector infrastructure-sharing arrangements and look for opportunities to improve practices. Infrastructure-sharing arrangements with electricity sector operators (both KOSTT and KEDs) have reduced the cost and sped the roll-out of efficient broadband infrastructure in Kosovo. Cross-sectoral collaboration could potentially help relieve remaining connectivity bottlenecks, including at the international level. The World Bank Digital Highways initiative provides extensive analysis of the potential benefits of infrastructure-sharing for digital connectivity in the Western Balkans. 45 All towers benefitting from the scheme will be shared by both mobile network operators will need to be designed sustain third potential operator, if any. 46 EU’s Digital Agenda for 2030, https://ec.europa.eu/info/strategy/priorities-2019-2024/europe-fit-digital-age/ europes-digital-decade-digital-targets-2030_en 47 https://www.bbc.com/future/article/20200305-why-your-internet-habits-are-not-as-clean-as-you-think 48 See Directive 2014/61/EU of the European Parliament and the Council of 15 May 2014 on measures to reduce the cost of deploying high-speed electronic communications networks. Spotlight - Digitalization and Digital Trade 53 Preparing the ground for 5G technology is essential. Once deployed, 5G infrastructure will provide new service capabilities and become the central infrastructure and enabler for large parts of the national digital economy, as new services will require the very rapid transmission capabilities fiber optic and 5G technologies provide. Nationwide migration to 5G will require major densification in the radio access network and therefore significant investment to increase the number of mobile cell sites. The following steps could improve the mobile broadband market today and lay the grounds for 5G deployment: • Conduct an analysis of the wholesale mobile call origination services market and identify whether any MNOs hold significant market power. If they do, impose relevant obligations to prevent anticompetitive practices. • Expedite implementation of the second phase of the frequency release plan to facilitate investments in mobile broadband infrastructure. • Prepare a national 5G strategy that includes time-bound coverage and quality objectives aligned with strategic directions of the European Union as well as relevant cybersecurity requirements. Kosovo could consider preparing its 5G strategy as part of its new broadband strategy. • Continue supporting improvements in mobile tower connectivity. The revised matching grant scheme supported only a handful of mobile towers. Further efforts are needed to identify additional towers, in consultations with MNOs. • Review and simplify the permit-granting process for mobile micro cell sites. Deployment procedures should be aligned with the light-touch approach used for wi-fi deployment. • Develop guidelines on the leasing of “street furniture” (such as streetlights, traffic lights, various street cabinets Using existing street furniture (rather than building new sites) could accelerate and reduce the cost of deploying 5G networks in cities. • Support 5G pilot projects and localized deployments to test new technology and build the business cases for its further adoption. For instance, in October 2020, Kosovo and Albania signed a Memorandum of Understanding to jointly develop a 5G corridor that will cover the Ibrahim Rugova highway running from Kosovo to Albania.49 This pilot could be replicated in other areas. Diversified and affordable international Internet connectivity is one of the primary requirements for investment in the cloud and data infrastructure, central elements of the digital economy. As Kosovo’s digital economy matures, demand for high-speed fixed broadband is expected to grow, moving such services into the mainstream and increasing competitive pressures among ISPs. Diversifying the supply routes for international connectivity in Kosovo should make high-speed broadband packages more affordable, as reductions in supply costs translate into lower retail prices (assuming a competitive retail market). Beyond the positive impact on retail market development, the increased supply of international connectivity would create a more favorable environment for data infrastructure development (cloud and data infrastructure, content delivery networks, and Internet exchange points). The following efforts could be considered: • Support the participation of KOSTT in the regional Balkans digital highway initiative and encourage cross-border infrastructure-sharing. KOSTT already shares its spare fiber assets nationally, and it has international connections with four of the five Western Balkan countries. None of these connections is commercialized, however, preventing improvements in international Internet connectivity. • Consider supporting national ISPs’ efforts to deploy new cross-border infrastructure. A handful of ISPs in the Western Balkans are active in more than one country. Increased cross- border interconnectivity among smaller national ISPs could strengthen business relations, consolidation, and regional integration. E-payments E-payment instruments—debit cards, credit cards, credit transfers, direct debits, and e-money— play a central role in facilitating digital transformation, particularly e-commerce. Online payments allow remote processing of transactions, without seller and buyer (or an intermediary) physically meeting. For consumers, easy-to-use online payments can help ensure a seamless and convenient online shopping experience. By avoiding cash, merchants can save on the administrative costs of handling coins and bills while reducing the scope for employee fraud and facilitating 49 Neither Kosovo nor Albania has a 5G network, and spectrum auctions have not yet been scheduled (Sbeglia 2020). 54 Spotlight - Digitalization and Digital Trade bookkeeping. Wider use of e-payments can also facilitate formalization. This section reviews the key constraints to the adoption and use of e-payments in e-commerce in Kosovo and provides detailed recommendations for increasing its use.50 Access to and use of e-payments Many Kosovars still lack access to transaction accounts, a prerequisite for most e-payment instruments. According to the 2017 World Bank Global Findex survey, only 52 percent of Kosovar adults had access to a transaction account with a financial institution—a smaller share than in several other countries in the Western Balkans and a significantly smaller share than in the European Union. Mirroring low account penetration, the use of e-payment instruments is less widespread in Kosovo than peer countries. A range of structural factors holds back the use of basic payment services among Kosovars, as shown in figure 41. Unless more businesses and government offices accept e-payments, customers have limited incentive to gain access to payment services; without more customers requesting e-payments, firms have limited incentive to invest in the necessary infrastructure. Another factor contributing to low usage is likely the large shadow economy in Kosovo. Figure 41. Account ownership, use of debit/credit cards and digital payments, and reasons for not owning a bank account in selected countries, 2017 a) Account ownership b) Use of debit or credit cards to make a purchase in past year Germany 99% Germany 87% Italy 94% United States 86% United States 93% Italy 78% Croatia 86% Croatia 60% Greece 85% Greece 50% North Macedonia 77% Turkey 48% Serbia 71% Serbia 39% Turkey 69% North Macedonia 37% Montenegro 68% Montenegro 31% Bosnia and Herzegovina 59% Bosnia and Herzegovina 26% Kosovo 52% Moldova 22% Moldova 44% Kosovo 17% Albania 40% Albania 8% 0% 20% 40% 60% 80% 100% 0% 50% 100% c) Made or received digital payments in past year d) Reasons for not owning a bank account Germany 98 of insu cient funds 27 United States 91 Italy 90 someone in the family has an account 26 Croatia 83 financial services are too expensive 23 Greece 74 Serbia 66 financial institutions are too far away 12 North Macedonia 66 Turkey 64 of lack of necessary documentation 12 Montenegro 60 of lack of trust in financial institutions 8 Bosnia and Herzegovina 50 Moldova 40 of religious reasons 4 Kosovo 39 Albania of no need for financial services ONLY 3 29 0% 20% 40% 60% 80% 100% % age 15+ 0% 20% Source: World Bank Global Findex Survey 2017. 50 This work builds on extensive work on payment services by the World Bank as part of its remittances and payments program. Spotlight - Digitalization and Digital Trade 55 Cash is the dominant payment instrument in Kosovo, especially for retail payments. In 2019, the total number of cashless transactions stood at 31.1 million—a per capita cashless transaction rate of 17.3 a year (table 3). Dependence on cash has led to increases in the volume of cash withdrawals from automatic teller machines (ATMs).51 The number of bank accounts with access to e-banking services exceeded 250,000 at the end of 2018 (15 percent of bank current accounts), according to the Central Bank of Kosovo. Bankers interviewed for this report reported an acceleration of e-banking channels in 2020, in response to COVID-19 pandemic restrictions. Table 3.  Number of cash and noncash transactions in Kosovo, 2005–19 Type of transaction 2015 2016 2017 2018 2019 Paper-based credit transfers 13,731,800 15,440,364 15,246,593 12,346,739 12,680,625 Electronic credit transfers 2,311,564 2,915,082 3,407,660 4,391,441 5,199,787 Payments with cards 5,471,659 6,811,339 7,610,989 10,631,516 13,266,708 Direct debits (intrabank) 15,565 26,610 23,151 2,738 1,037 Total noncash transactions 21,530,588 25,193,395 26,288,393 27,372,434 31,148,157 Noncash payments per capita 11.96 14.0 14.6 15.2 17.3 Source: Data from the GPSS 2017 and the Central Bank of Kosovo. Payment cards, especially debit cards, are the most heavily used noncash payment instrument. Their usage grew by almost 25 percent a year between 2015 and 2019. Still, only 37 percent of adults in Kosovo have a debit card (compared with about 51 percent in countries in Europe and Central Asia), and they are still used mostly for cash withdrawals from ATMs (table 4). The number of payment cards (including debit cards, credit cards, and delayed debit cards [charge cards]) for individuals and businesses stood at 1.295 million at the end of 2019, up 9 percent over the previous year (CBK 2020b). Table 4.  Value and share of automatic teller machine (ATM) and point-of-sale (POS) transactions in Kosovo, 2021 ATM withdrawals POS transactions Period Domestic bank clients Foreign bank clients Domestic bank clients Foreign bank clients Fiscal year 2018 1,989 (75.5) 342 (13.0) 213 (8.1) 91 (3.5) Fiscal year 2019 2,302 (74.6) 416 (13.5) 235 (7.6) 132 (4.3) January and February 2021 393 (75.6) 65 (12.4) 31 (6.0) 31 (6.0) Source: Central Bank of Kosovo 2021b. Note: Figures are millions of euros. Figures in parentheses are percentages of total. ATM and point-of-sale (POS) infrastructure is not sufficiently developed in Kosovo. The number of ATMs per 100,000 adults is 35.3, among the lowest in the region. The number of ATMs per 100,000 adults decreased from almost 40 in 2015 to 35.3 in 2018. The number of POS terminals per 100,000 adults increased from 540 to 642, but the figure is still low for the POS terminals are used almost exclusively for card payments to merchants, although some banks recently introduced cashback services. Table 4 presents some basic data on ATMs and POS terminals in Kosovo. 51 Data are from a World Bank study on the use and cost of retail payment instruments in Kosovo. 56 Spotlight - Digitalization and Digital Trade Table 5.  Automatic teller machines (ATMs) and point-of-sale (POS) terminals in Kosovo, 2019 Type of technology Number of terminals ATMs 497 ATM with cash withdrawals function 497 ATM with credit transfer function 51 ATM with deposits function 244 POS terminals 13,769 POS terminals with cash withdrawals function 87 EFTPOS terminals 13,682 E-money terminals 16 Source: Data from the Central Bank of Kosovo, December 2019. The deployment of card-based mobile wallets and click- to-pay options could strengthen the card- based user experience in the coming years. Discussions with Apple are ongoing to facilitate the introduction of mobile wallets in Kosovo. Financial market payment infrastructures and instruments Kosovo has a single interbank payment system (IPS).52 It is regulated, owned, operated, and overseen by the Central Bank of Kosovo (CBK), which automatically provides clearing and settlement services on a net basis based on clearing sessions as well as on a gross basis for all transactions. Thirteen institutions participate in the IPS, including 10 commercial banks, the CBK, the Ministry of Finance/Treasury, and the pension fund. Microfinance institutions, insurance companies, and other institutions hold transaction accounts with direct participants, which act as their agents. Commercial banks connect to the IPS using leased lines from telecommunication companies. The IPS is used for both small-value and large-value domestic transactions. It clears all priority, individual, mass, Kos-Giro, and direct debit payments. Priority payments can be submitted at any time during the IPS operating day; they are cleared immediately on a gross basis. Individual payments are single-credit transfers, which are typically initiated at a bank branch after the payer completes a paper payment order, which is then input into the bank’s core banking system and subsequently forwarded to the IPS for clearing. The payer either pays in cash or authorizes a deduction from his or her bank account. Currently, there is no national payment switch in Kosovo, which would facilitate interoperability among different payment transaction types. However, it is possible to withdraw cash or pay with a Visa or Mastercard branded card issued by a local bank at the ATM/POS terminal of another local bank, as these terminals are connected via the Visa and MasterCard global processing networks. The IPS supports participants’ interoperability with regard to account transfers and direct debits. The CBK aims to implement a fast payment system (FPS) to make and settle small value payments instantly. The FPS is considered an added value service, especially for P2P or P2B mobile payments, that would create more opportunities for existing and new payment service providers as well as for merchants (which could, for example, scan QR codes from mobile apps to execute payments instead of using POS terminals). Account-to-account interoperability could be achieved through application of programing interfaces (APIs), given that different payment service providers have to participate in the system in order to provide the service to their users across different types of transaction accounts. The use of paper-based credit transfers has declined in Kosovo since 2018. Apart from payment cards, electronic initiation channels are increasingly being used for credit transfers, making them fully electronic.53 Direct debit transactions decreased markedly in 2018, after the main participant, the Kosovo Electricity Supply Company, left the direct debit scheme. At the same time, electronic 52 The IPS platform, implemented on July 1, 2016, is based on ISO 20022 standards. It consists of two main components: real time gross settlement (RTGS) and an automatic clearinghouse (ACH). The CBK runs three automatic clearinghouse sessions a day, for all payments worth less than €10,000. Priority payments and all payments of more than €10,000 are processed in real time (8:15–15:45). For other payments, settlement is done on a net basis through clearing sessions in IPS accounts. 53 E-payment instruments use electronic means for the initiation, authorization, and authentication of a payment transaction. Although though a transaction may be initiated electronically, however, in some cases the subsequent processes of clearing and settlement involve some manual procedures. Spotlight - Digitalization and Digital Trade 57 credit transfers grew by 18 percent. Most retail banks in Kosovo now offer online banking services. Penetration remains low, however, with only about 303,602 accounts held by individuals accessible via online banking in 2019. E-money is available in Kosovo. Discussions with stakeholders reveal that it is being issued by licensed nonbank payment service providers. Interoperability of e-money with bank accounts and among e-money issuers exists, as solutions allow only cash in and cash out at specific point of sale Four e-money issuers operate in the country, only two of which (Paysera and IBAS) allow the transfer of funds to a bank account (CBK 2021). Kos Giro is a scheme that allows consumers to pay their bills. Billers such as utility companies and government institutions (Customs, the Kosovo Property Agency) include a standardized payment form at the foot of the bills they issue. This payment form contains payment details in a barcode, which is scanned when the consumer presents the bill for payment at any bank office. The payment details are captured and forwarded to the IPS via the commercial bank’s core banking system; payers pay in cash or through a debit to their account (if the payer has a bank account and the form is presented at the payer’s bank). Direct debit was introduced for public use in Kosovo in November 2009. Clients authorize their bank to debit (withdraw) funds directly from their account. It is suitable for recurrent payments. E-commerce solutions for merchants Three domestic banks (Procredit, TEB, and Raffaisen) and one e-money institution (PaySera) offer virtual POS solutions for VISA and Mastercard cards that can be integrated into web- shops. However, they require in-person contact for contract signature and Know Your Customer (KYC). The traditional approach to giving a web-shop e-payment capabilities is to open a merchant account with a bank and set up a payment gateway (which could be offered by the bank itself or by a third-party provider that collaborates with the bank or provides the service itself ) to enable online payment acceptance. This approach requires upfront investments and technical expertise— investments that become profitable only if enough customers use the service. Businesses’ information technology (IT) is reportedly not structured to operate online. Investments needed to enable this kind of operation are costly and often beyond the digital competences of in-house staff. For example, inventory management is often not digitized. Domestic online retailers rely largely on cards and cash-on-delivery (COD) to settle transactions. Approximately 600 businesses have POS terminals (CBK 2021). The use of account transfers for e-commerce is limited, however, because the main banking players do not support reconciliation within web-shops is (in contrast, players such as PaySera strongly promote this service). The many Kosovars without access to e-payment instruments want to be able to participate in e-commerce while paying with cash. Many consumers prefer to avoid sharing payment information online, in order to contain the risk of data theft and avoid making an online payment for a product that might not arrive or meet expectations. Installment purchases, bundled to purchases with cards, are part of a dedicated offering. Merchants charge a fee of 5–6 percent of the sales amount for installment purchases, which are available for both online and in-store purchases. On the merchant side, Kosovo has implemented the international card scheme mandate EMV 3DS2.0. The enriched merchant data set, channeled through the new solution, is expected to benefit customer risk management, reducing fraud and improving the customer experience. Improving the customer experience is particularly relevant in Kosovo, where acquirers report high levels of card abandonment during online shopping at the payment page. Implementation of EMV 3DS2.0 on the merchant side is supported on the issuing side, where cardholders are massively enrolled in SMS OTP services. One-stop shop payment service providers, such as 2checkout, Shopify, and Stripe, have significant potential as enablers of e-payments. These providers make it easier for e-commerce companies to integrate e-payments into their web-shops and allay customer concerns about fraud. Relative to traditional online card payment solutions, which require opening a merchant account with a bank and integrating a customized payment gateway into the web-shop, these payment service providers offer simple and transparent plug-in solutions and application programming interfaces (APIs) that e-commerce companies can build into their websites without incurring large upfront costs. Financial data such as card and bank account details are shared with the payment service provider, which then credits the web-shop once the payment has occurred. These integrated service providers have significant potential as entry-level e-payment options to help emerging web-shops grow. 58 Spotlight - Digitalization and Digital Trade So far, however, international integrated payment service providers offer limited or no functionality in Kosovo. Their services need to be integrated within the local financial ecosystem, including by building relationships with local financial institutions so that payments can be transferred quickly and at low cost to and from the financial accounts of the users. The benefits of entering a small market like Kosovo can appear limited for large international companies. As a result of high entry costs and limited perceived business opportunity, international payment service providers have been slow to expand their services to the Kosovar market. Public institutions are close to launching a payment gateway, eKosova, serviced by one of the largest banking players. The service plans to offer online payment acquiring for cards, direct debits, and e-wallets, allowing customers to pay online for a range of public services. eKosova will not initiate or make payments; it will prepare a pre-invoice for the initiator and/or executor of the payment and send it through a secure channel. The portal will wait for a response from the financial institution to complete the electronic service. Regulatory framework on electronic payments The Law on the Central Bank of Kosovo of 2010; the Law on the Payment System of 2013; and to a lesser extent the Law on Banks, Microfinance Institutions, and Nonbank Financial Institutions in the Republic of Kosovo of 2012 form the legal foundation for the national payment system (NPS). The Law on the Central Bank of Kosovo and the Law on the Payment System empower the CBK as the regulator and overseer of the NPS. The CBK issues regulations, decisions, operational rules, standards, and procedures governing the NPS as well the activities of various other NPS participants (banks, nonbank financial institutions authorized to provide payment services, private payment system operators). Based on existing laws, the CBK has either approved or is in the process of approving a set of regulations that cover in detail a wide variety of aspects related to payment systems, instruments, and services. They include the regulation for setting the criteria, procedures, and terms for authorizing registered nonbank financial institutions (NBFIs) to provide payment services, the regulation on the functioning of the interbank payment system, the regulation on issuing electronic money, the regulation on the use of agents and outsourcing by payment services providers, the regulation on the authorization of payment system operators, the Instruction on the National Payments Council, the regulation on own funds and safeguarding requirements applicable to NBFIs, and regulations on anti–money laundering/combating the financing of terrorism. Current e-money regulation represents an important step toward making the market more competitive. In January 2020, Kosovo issued the regulation on electronic payment instruments (REPI). Under the REPI, NBFIs are eligible to issue e-payment instruments (until the regulation was adopted, only banks could do so). Though, REPI does not provide adequate provisions for licensing procedures for e-money issuers or indicate how the CBK will oversee them. These additional steps are needed to meet EU standards in this area. Key aspects to underpin increased consumer uptake of transactions accounts and modern payment instruments. It can do so partly by transposing relevant EU directives. Critical topics in this area include the protection of customers’ funds held in transactions accounts, transparency in the provision of payment services, and consumer complaint mechanisms. Other important measures are already in place, such as an explicit deposit insurance, which covers deposits in banks of up to ¤5,000 per depositor per bank; a consumer protection law from 2018 that covers the distance marketing of consumer financial services and consumer credit contracts; and the Law on Payment Systems, which addresses payment services. Kosovo has enhanced its laws and regulations pertaining to the NPS and is expected to implement the Payment Services Directive 2 (PSD 2) in 2021. Its current legal framework is conducive to implementing one of the three options for FPS discussed in this note, as analyzed in the following sections. The role of the Central Bank of Kosovo The CBK plays various critical roles in Kosovo’s NPS, acting as operator of payment systems, overseer of the system, and catalyst of change. As an operator of payment systems, the CBK owns and operates the interbank payment system (IPS), which comprises a real-time gross settlement (RTGS) component for high-value payments above ¤10,000 and an automated clearinghouse (ACH) component for retail payments below this threshold. The IPS also facilitates the settlement of government securities trades in the primary and secondary markets. The CBK also owns and operates a central securities depository, which is integrated with the IPS. Spotlight - Digitalization and Digital Trade 59 The  RTGS participation  criteria  are  clear, and there is no tiered participation in  the  RTGS. Once payment service providers (PSPs) are introduced in the market, they can join the ACH as direct participants while not being direct participants in the RTGS. Close attention will need to be paid to risks of indirect participation, to ensure proper control of the transfer of risks from indirect to direct participants in the system. There are no indirect participation criteria; no indirect participants have been contemplated, even if an organization such as the post office is participating through a commercial bank. The CBK is legally empowered as the regulator and overseer of the NPS in Kosovo (under Article 8 of the Law on the Central Bank of Kosovo and Article 8 of the Law on the Payment System). These powers explicitly cover payment and securities settlement systems as well as payment services. The payment system oversight function is separated by operational function Strengthening of its capacity is currently underway, with the CBK revising its entire oversight policy framework and operational guidelines, with World Bank technical support. The CBK also contributes to the development and reform of the NPS in its capacity as catalyst of change. The CBK is working on finalizing a National Retail Payments Strategy (NPRS), which is still in draft form. It builds on the efforts undertaken by the CBK, in coordination with other public sector authorities and the private sector, to modernize the NPS. The overarching objective of the NRPS is to promote usage of modern (that is, fully electronic) retail payment instruments across the country. Meeting these goals will require increasing access to transaction accounts. Implementing what is currently envisioned into the draft NRPS would increase the ownership and usage of accounts and improve the quality of payment services to customers. Implementation of such a strategy would benefit existing and new customers in the following ways: • increasing the speed with which retail payments are initiated, cleared, and settled • enhancing the reliability of payments and their immediate availability through domestic infrastructure and the distribution and payment acceptance channels that support retail payments • increasing convenience by expanding the possibilities to pay electronically, remotely or onsite • making payment services increasingly affordable to individuals, businesses, and the government by promoting enhancements to financial infrastructure and broadening acceptance and by fostering increased competition and innovation in the provision of payment services. Recommendations for facilitating the use of e-payments Policy makers in Kosovo could consider the following reforms: 1. Ensure the effective implementation of the Law on Electronic Identification and Trust Services in Electronic Transactions. The introduction and implementation of the law would increase flexibility and reduce transactions and operational costs, allowing payment service providers to contract merchants remotely to offer payment-acquiring services, for example. It would also facilitate remote contracts internationally, by ensuring mutual recognition. 2. Introduce a basic payment account. Kosovo could increase financial inclusion by requiring banks to provide a “basic payments account”—a low-cost starter account bundled with a debit card for individuals who have never held an account and belong to vulnerable groups. The roll-out of a basic payments account framework modelled on the European Payment Account Directive is among the policies the authorities are considering. 3. Increase intergovernmental coordination on the promotion of e-commerce and digital channels. A coordinated approach by government institutions and agencies, supported by regulatory action – such as an action plan or a Law- would streamline processes. 4. Create a framework for collecting statistics on e-commerce. Introducing reporting requirements for regulated financial institutions and the largest retailers active in the market could help fill the data vacuum. 5. To spur the growth of electronic transactions in general and e-commerce in particular, provide nonbank payment service providers access to the IPS. Such access should be determined on a transparent basis, based on risk. The CBK is considering this idea. Providing such access would facilitate the role that nonbank PSPs could play by using modern technologies to both deliver new payment services across the country and increase 60 Spotlight - Digitalization and Digital Trade financial inclusion. It is critical to establish full operational interoperability across PSPs, to avoid the creation of closed-loop solutions. 6. Enable nonbanks to decide whether to apply for direct or indirect participation in the IPS, based on their own cost–benefit assessment. This assessment would weigh the higher (financial and compliance) costs associated with direct participation against the advantages of not having to go through (potentially competing) banks for settlement. 7. Continue to monitor the market and support the interoperability of emerging payment solutions. CBK should focus its efforts on monitoring the players that are offering or that would envisage creating e-money closed-loop solutions. Interoperable solution would allow funds to be transferred between e-money institutions and between banks and e-money institutions. 8. Increase consumer trust. Implement a financial education campaign on the use of e-payments for online shopping for businesses and potential consumers, educating them on the benefits of using e-payments online (including convenience and greater security), the rights of consumers and businesses during online transactions, and precautions they can take to avoid becoming victims of online fraud. One of the aims of such a campaign needs to be alleviating fear of dealing with unresponsive, complicated systems prone to operational error and the perceived loss of privacy. The OECD policy handbook on the design of national financial education strategies (OECD 2015a) could be useful resource. 9. Increase consumer protection by introducing an online claim resolution mechanism. Econsumer.gov is a partnership of 36 national consumer protection agencies that provides, among other services, an international platform to address cross-border claims (discussed in detail in the next section). The introduction of a zero-liability policy on consumer debit cards would increase the confidence in the use of this payment instrument. Several countries have put such schemes in place. 10. Support the establishment of domestic operations for international payment service providers. The authorities could encourage the entry of established international players of e-commerce payment services by creating a conducive environment for their operations and initiating a bilateral dialogue with selected PSPs. 11. Evaluate the benefits of account transfers and a fast payment transfer system for e-commerce. If the buyer and seller have access to bank accounts, e-commerce payments can be facilitated through direct account-to-account credit transfers. A fast payment solution could facilitate payment confirmation and reconciliation on the merchant side in near real time. 12. Foster innovation by exploring the establishment of an innovation hub on financial technology (fintech). Innovation hubs could help the CBK monitor the new business models and technologies and identify regulatory and supervisory challenges associated with fintech’s impact on e-commerce. These hubs are less resource intensive than regulatory sandboxes and represent a good first step for gauging the interest and maturity of the market (see World Bank 2021b). Innovation hub would establish a dedicated point of contact for firms that would answer enquiries about fintech-related issues and provide nonbinding guidance on regulatory and supervisory expectations, including licensing requirements. An innovation hub can take any form the regulator deems most beneficial and suitable. Its creation signals to the market that the regulator is keen to interact with and enable the emerging field of fintech. Although providing guidance tends to be their most common function, innovation hubs can also host and attend industry events to provide assistance in applying for authorization for new products. Innovation hubs facilitate regulator–innovator engagement and act as a point of contact for the industry for mutual learning and policy and regulatory guidance. 13. Define and adopt a standard for QR-code-based solutions at the POS. The definition and adoption of a single standard for the management of a QR code interface could support the take-up of digital payments. In recent years, many countries have realized the need to establish a standard QR specification for use in all payment systems, to address the need for interoperability. Some countries have based their QR specification on EMVCo specifications, to enable interoperability in the future, as an increasing number of operators and participants are adopting these specifications. Spotlight - Digitalization and Digital Trade 61 06 Regulatory Readiness Assessment for Digital Trade Laws and regulations can foster digital trade. Regulations can enable the use of essential regulatory tools for remote transactions, such as electronic documents and signatures and improve trust in digital markets, by ensuring that consumer information is safe and remains private. However, the regulations can also hamper the conditions for digital markets, by restricting the types of goods and services that can be bought online; limit or increase the costs of transferring data; or create burdensome conditions for online marketplaces, platforms, and services providers. This section reviews the main policy areas that build the regulatory framework for digital markets in Kosovo (figure 42). It considers a set of regulatory areas of central importance to digital markets and assesses the domestic regulatory frameworks, including electronic documentation and signature, online consumer protection, data privacy and protection, cybersecurity, and intermediary liability regulations.54 Figure 42. Main policy areas for a regulatory framework for digital trade ENABLING REGULATORY RESTRICTIVE POLICIES MEASURES e-trade Cybersecurity Domain name Intellectual Property restrictions intermediary liability fair use Privacy Consumer protection and data Ban of online sales protection E-payments E-signature Data localization Electronic documentation regulation Source: World Bank staff Kosovo has introduced a modern and comprehensive regulatory framework for digital trade, notwithstanding the implementation gaps. The framework closely follows international guidelines and practices, especially those of the European Union driven by the Stabilization and Association Agreement. Kosovo’s regulations on electronic documents, data privacy, and cybersecurity are in line with the most advanced regulations, offering a solid regulatory framework that protects consumers while limiting the costs and restrictions faced by digital businesses. Kosovo does not maintain restrictive regulations found in other jurisdictions, such as burdensome licensing requirements for e-commerce platforms, such as limitations on the type of goods that can be sold online (other than for generally accepted public policy considerations) or restrictions on cross-border data flows. In other regulatory areas— online consumer protection, and intermediary liability—gaps remain. Though, regulatory progress has been significant, institutional capacity and administrative procedures to implement these regulations do not always reflect the regulatory mandate. For instance, the personal data protection regime lacks an effective supervisory authority to oversee compliance and protect individual rights. In other areas, such as cybersecurity and intermediary liability, a shortage of relevant professional skills limits enforcement of existing rules. These gaps can jeopardize efforts to create a comprehensive framework for digital trade, as they increase uncertainty, which translates into higher costs and risks for digital businesses. Regulations must be accompanied by comprehensive efforts build capacity in all areas covered by these rules. A comparative review of key regulations on digital trade confirms that Kosovo’s regulatory framework for digital trade—and that of the Western Balkans as a whole—is advanced. The Digital Trade Regulatory Readiness Index reviews and scores a set of regulations for digital trade for 54 Additional policies relevant to digital trade that are not covered include regulations on competition policy, taxation, and intellectual property, as well as the conditions for business licenses. 64 Regulatory Readiness Assessment for Digital Trade 53 countries, including Kosovo and its neighbors (figure 43).55 The Western Balkan countries score well (16.0–18.5, on a 0–20 scale), reflecting the regulatory efforts made through the Stabilization and Association Agreement. Kosovo’s score was 17.5. Figure 43. Digital regulatory index for selected countries, 2021 a) Scores of structural and aspirational peers b) Composition of the index Kosovo 17.5 Electronic documents Albania Bosnia and Herzegovina Croatia Intermediary Electronic liability signature Montenegro North Macedonia Serbia Armenia Online France Cybersecurity consumer protection Kazakhstan Kyrgyzstan Data privacy Moldova Kosovo Western Balkans World HIC MIC 0 5 10 15 20 Source: World Bank staff. Note: The index reflects the laws and regulations on the books, not their implementation. Regulations on electronic transactions The legal recognition of electronic documents and electronic signatures is a crucial step in building a thriving digital market. As communication technologies connect people and businesses around the world with increasing ease and convenience, businesses engaged in digital trade expand their network of clients and suppliers across borders. A conducive regulatory framework for digital trade should guarantee that contracts concluded remotely through electronic channels are as valid and legally enforceable as those concluded in person. Electronic documentation A strong and reliable framework for e-documents is particularly important for digital firms focused on business-to-business (B2B) transactions, such as the business process outsourcing (BPO) sector. Transactions by final consumers, such as those on e-commerce platforms such as Amazon and app-based services like Airbnb, do not typically entail major documentation exchanges and can be concluded even without a specific regulatory framework for electronic transactions. In contrast, for business relations that require customization of products and services and that are provided over time (such as relations that allow suppliers to connect to global value chains and/or services that require peripatetic delivery over extended contract periods), the ability to conclude a contract or amend its terms remotely in a secure and reliable manner is critical. The United Nations Commission on International Trade Law (UNCITRAL) Model Law on Electronic Commerce (MLEC) of 1996 is the international standard on regulation of electronic documents. Its main objective is to facilitate remote transactions by establishing rules to allow the electronic equivalent of paper-based documents to be legally recognized. The MLEC promotes the principles of nondiscrimination, technological neutrality, and functional equivalence in the treatment of electronic documentation. The principle of nondiscrimination is the cornerstone of the regulation, as it ensures that a document cannot be denied legal effect, validity, or enforceability solely on the grounds that it is in electronic form. 55 The database includes 18 high-income countries (HIC); 31 middle-income countries (MIC), including all countries in the Western Balkans and the Middle East and North Africa; and 4 low-income countries (LIC). Regulatory Readiness Assessment for Digital Trade 65 Kosovo’s regime on electronic documentation broadly follows international guidelines. Its Law on the Information Society Services includes a chapter on the legal requirements for data messages, providing solutions in line with the MLEC recommendations on electronic documents. Like the laws of all structural peers reviewed, the law recognizes electronic documents as legally equivalent to paper-based documents. Under the law e-documents cannot be denied admissibility as evidence in legal proceedings based solely on their electronic nature. Providing an express regulatory solution provides transparency and certainty for all parties. In line with the recommendations of UNCITRAL and most countries in the region, Kosovo’s Law on the Information Society Services includes a provision detailing the admissibility of e-documents as evidence. Kosovo’s regulation is technology neutral regarding the storage of e-documents. Although the law requires that the method of storage preserve the integrity of the information, the requirement does not apply to endorsements and necessary changes that do not affect the information. This is not the case for some structural peers. For example, Albania’s Law on Electronic Document includes a provision (Articles 6.C and 18) requiring the “inviolability of the electronic document” during storage of the electronic document. Although this condition appears to promote cybersecurity measures, it can also be understood as requiring specific cybersecurity requirements for storing electronic documents, which would unnecessarily limit the scope of the electronic documents. Under a strict reading, the requirement would suggest that documents such as email or nonencrypted documents may not be fully recognized as electronic documents equivalent to paper documents. This requirement can be unduly restrictive; parties to a contract should be free to decide what is most appropriate based on their circumstances. Electronic signature A regulatory framework should recognize electronic signatures as a legally valid form of accepting an obligation or terms of a document. It should also ensure that, when an electronic signature meets certain requirements, it has full recognition of validity and enforceability, just like a handwritten signature.56 The UN Convention on the Use of Electronic Communications in International Contracts provides that e-signatures satisfy a legal requirement for a signature under conditions. The method used to identify the party’s intention with respect to the information attached must be either as reliable as appropriate for the purpose of the electronic communication or proven to have fulfilled the requirements. The convention’s scope is limited to contracts between parties whose places of business are in different countries; it excludes certain transactions, including contracts for family or household purposes and transactions on a regulated exchange. The UNCITRAL Model Law on Electronic Signatures of 2001 provides the standards for an e-signature to be considered legally equivalent to a handwritten signature. It also lays out the basic rules of conduct regarding the responsibilities and liabilities of the parties, including the signatory, the certification service provider (CSP), and the relying party. Any method of creating an electronic signature that satisfies certain requirements satisfies a legal requirement for a signature. If deemed sufficiently reliable, foreign certificates and electronic signatures are recognized regardless of the place of issuance of the certificate, the creation or use of the signature, or the place of business of the issuer or signatory. With the growth of e-commerce around the world, governments have enacted legal instruments to give recognition and legal validity to electronic and digital signatures. Three regulatory models are currently in place (Frederick Fischer 2001; Blythe 2011): • The prescriptive approach recognizes only one type of e-signature as legally valid: secure digital signatures that have adopted specific encryption mechanism and that were issued following prescribed procedures. Secure digital signatures provide the greatest security, but the prescribed technology and procedures are unnecessarily costly and burdensome for most activities, as parties are forced to resort to certification authorities and pay a fee to them (Blythe 2011; Adobe 2019). • A minimalist or permissive approach allows parties to choose the technology they prefer and grants all technologies equal legal validity. The United States, Canada, Australia, and New Zealand have adopted this approached (AssureSign 2019). This approach affords the greatest liberty to the parties in adopting any type of technology, thereby reducing costs, but it fails to acknowledge that 56 Handwritten signatures, in addition to being legally valid, are also enforceable, as they create the presumption that they were inserted by the designated person (a rebuttable presumption that allows the interested person to show proof, for instance, that the signature had been forged). Electronic signatures can be recognized as legally valid but may or may not be given full enforceability depending on the technology and procedures used. Typically, only digital signatures that use some type of encryption technology are given full enforceability. An electronic signature that is not fully enforceable would require that the person claiming its validity also provide evidence that it was inserted by the designated person. 66 Regulatory Readiness Assessment for Digital Trade certain technologies are more secure than others and that greater security may be warranted in certain conditions. • The hybrid or two-tiered approach—which has become the preferred method of regulating electronic signatures around the world—is a mix between the first two approaches. It recognizes all technologies as legally valid while giving certain presumptions only to secure digital signatures. Like the prescriptive approach, it describes the requirements of a secure digital signature, and includes rules of conduct regarding the rights and responsibilities of the parties, including the signatory, the CSP, and the relying party. The European Union’s two-tiered model offers greater liberty to private parties in adopting digital signatures through technologies of their own preference—a two-tiered+ category. With a view to increasing security while reducing costs of adoption, the EU Electronic Identification and Authentication Services Regulation (e-IDAS) of 2016 allows parties to adopt a digital signature that meets all the security requirements of the secure digital signature (called “qualified electronic signature”) but provides greater freedom on the selection of the certification authorities. This approach is preferable, as it sets out the use of a specific technology (PKI) and procedures (CSPs) to ensure that secure digital signatures can indeed guarantee the identity of the signatory and the integrity of the content. These procedures are required, for instance, for submitting documents to the government. Kosovo has a two-tiered regulatory framework for electronic signatures and is working towards improving the legal framework and its implementation. The recently adopted Law on e-IDAS grants parties to a transaction greater freedom in selecting the technology and the CSP. It is expected to reduce the administrative burden and business costs for electronic transactions while providing an added layer of security. Stakeholders in the public and private sectors highlight the need to implement this law to improve the ease of participating in the digital economy. Establishment of a unit that is responsible for issuing digital certificates is critical for implementing and enforcing e-signatures laws. The courts have not yet engaged in making determinations as to the validity of e-signatures, leading parties to electronic transactions to rely on mutual trust, with no legal guarantees. Particularly with regard to international contracts, Kosovar companies are left at a disadvantage, as foreign clients often withhold payment until the quality of the good or service provided is determined to be up to standards. Trust-building regulations Regulation plays an essential role in bolstering digital markets by promoting trust. Lack of trust in remote transactions remain as one of the key impediments to online purchases. The lack of face-to-face contact with vendors, visual cues, such as location, facilities, and interaction, makes it difficult for consumers to gauge the retailer or supplier. Consumers perceive cross‑border online transactions and delivery as less secure than shopping from brick-and-mortar shops and believe that remedies do not exist when problems arise (WEF 2019a). Online consumer protection A detailed framework for online consumer protection should include digital-specific protections at all stages of the transaction to enhance consumer trust in e-commerce. Consumer concerns in e-commerce transactions include whether the information they enter online is safe, what the conditions for the sale are (pre-purchase), whether the goods purchased will meet their expectations when they arrive (purchase), and whether they are entitled to any remedies if problems arise during or after the transaction (post-purchase). These concerns can be addressed through regulations on information disclosure, the right to withdraw from a transaction, dispute resolution, and redress (figure 44). Online consumer protection laws should build on the principles and mechanisms of traditional consumer protection regimes, extending and adapting those protections to digital markets, in order to reduce some of the challenges of buying and selling online. Figure 44. Stages of consumer protection regulations Pre-Purchase Purchase Post-Purchase information discolsure contract terms right of withdrawal product features resolution and redress Regulatory Readiness Assessment for Digital Trade 67 The key principles for online consumer protection are recognized in two international soft- law instruments. In 2016 the OECD revised its Recommendation on Consumer Protection for E-Commerce of 1998, modernizing its approach to fair business practices, information disclosure, payment protections, unsafe products, dispute resolution, enforcement, and education (box 1). Box 1. OECD principles for protection of consumers using e-commerce Pre-purchase 1. Transparent and effective protection: Consumers who participate in e-commerce should be afforded transparent and effective consumer protection that is not less than the level of protection afforded in other forms of commerce. 2. Fair business, advertising, and marketing practices: Businesses engaged in e-commerce should pay due regard to the interests of consumers and act in accordance with fair business, advertising, and marketing practices as well as the general principle of good faith. 3. Online disclosures: Online disclosures should be clear, accurate, easily accessible, and conspicuous, so that consumers have sufficient information to make an informed decision regarding a transaction. Online disclosures comprise the following recommendations: a. Information about the business: Businesses engaged in e-commerce with consumers should make readily available information about themselves that is sufficient to allow, at a minimum, (a) identification of the business; (b) prompt, easy, and effective consumer communication with the business; (c) appropriate and effective resolution of any disputes that may arise; (d) service of legal process in domestic and cross-border disputes; and (e) location of the business. b. Information about the goods and services: Businesses engaged in e-commerce with consumers should provide information describing the goods or services offered that is sufficient to enable consumers to make informed decisions regarding a transaction c. Information about the transaction: Businesses engaged in e-commerce should provide information about the terms, conditions, and costs associated with a transaction that is sufficient to enable consumers to make an informed decision regarding a transaction. Consumers should be able to easily access this information at any stage of the transaction. Purchase 4. Confirmation process: Businesses should ensure that the point at which consumers are asked to confirm a transaction, after which payment is due or they are otherwise contractually bound, is clear and unambiguous, as should the steps needed to complete the transaction, especially for new payment mechanisms. Post-Purchase 5. Dispute resolution and redress: Consumers should be provided with meaningful access to fair, easy-to-use, transparent, and effective mechanisms to resolve domestic and cross-border e-commerce disputes in a timely manner and obtain redress, as appropriate, without incurring unnecessary cost or burden. Mechanisms should include out of court mechanisms, such as internal complaint handling and alternative dispute resolution. Subject to applicable law, the use of such out-of-court mechanisms should not prevent consumers from pursuing other forms of dispute resolution and redress. 6. Privacy and security: Businesses should protect consumer privacy by ensuring that their practices relating to the collection and use of consumer data are lawful, transparent, and fair; enable consumer participation and choice; and provide reasonable security safeguards. Other 7. Education, awareness, and digital competence: Governments and stakeholders should work together to educate consumers, government officials, and businesses about e-commerce, in order to facilitate informed decision making. They should work toward increasing business and consumer awareness of the consumer protection framework that applies to their online activities, including their rights and obligations, at the domestic and cross-border levels. 68 Regulatory Readiness Assessment for Digital Trade Kosovo has a comprehensive regulatory framework for consumer protection in digital transactions and is among the top performers in the region. In line with international good practices and the laws of other countries in Western Balkans and Europe, Kosovo’s regulatory framework includes most of the main features relevant to online consumer protection. The law requires essential information disclosures on product-specific and transaction conditions. The right of withdrawal allows online consumers to return the product within a certain period of time, freeing them from their contractual obligations with no repercussions. The law includes the right of withdrawal with a cooling-off period of 14 days. Customers are not required to provide a reason for returning a product. Merchants must provide redress for harm suffered as a consequence of a product that is defective, damaged, or does not meet the advertised quality criteria. In the case of defective or inadequate products, consumers are entitled to a refund, repair, replacement, or price reduction. Customers’ main concern about buying online is that the product does not meet their expectations and will be difficult to return. This concern suggests a lack of awareness of consumer rights or enforcement of those rights by the authorities. Kosovo has no legally mandated online dispute-resolution mechanism. Traditional judicial mechanisms are poorly suited to cross-border e-commerce disputes. Modern regulations increasingly call for e-commerce firms to feature an online dispute-resolution mechanism that allows for a quicker and less expensive alternative to traditional disputes. In Europe and Central Asia, only France, Montenegro, and Croatia provide this option to online consumers. Kosovo joined the International Consumer Protection and Enforcement Network (ICPEN) in 2016. This international organization brings together consumer protection agencies from over 65 countries to increase information sharing and cooperation among agencies. The Ministry of Trade engaged in the drafting of an e-commerce law that envisaged a provision mandating online dispute resolution. However, these efforts stalled. Adoption of online dispute resolution can be done in a cost-manner effective by subscribing to existing international mechanisms. Econsumer.gov., for instance, is a partnership of 41 consumer protection agencies that provides an international platform for addressing cases of cross-border claims. It is one of the first examples of an international online dispute-resolution platform meant to help consumers and agencies combat international scams. It allows consumers to make cross- border fraud complaints in several languages and across many industries. This solution, together with consumer protection regulation that expands consumer rights by providing an online dispute- resolution mechanism, would create a stronger framework for online consumer protections in Kosovo. Data protection Consumers are increasingly aware of the value of their personal data. Lack of trust in the way personal data are managed causes consumers to eschew electronic transactions, limiting the growth of digital markets. Certainty about online data use and handling increases trust in digital trade. At the same time, burdensome regulations on the use and transfer of individual data can add substantial costs for businesses, especially SMEs. The goal is hence to allow data transfers in a manner that supports the expansion of digital markets while increasing consumer trust that their private information remains secure and under their control. Data privacy legal frameworks consist of entitling rights for all or certain types of individuals (“data subjects”) regarding the collection, usage, storage, and disposal of their personal data. They also create obligations for controllers and processors while allowing exemptions in certain circumstances (state security, public safety, and so forth). Security processes for data controllers (either public or private) ensure the appropriate processing of personal data. Several international instruments set out the key principles of data privacy regulation. The Convention “108+” by the Council of Europe is an international human rights treaty focused on data protection. It sets out principles that are compatible with the requirements of the European regulation. In 2013, OECD members updated their Guidelines on the Protection of Privacy, adopted in 1980, to account for the new reality of digital data flows. The guidelines declare digital risk an economic risk and aim to protect privacy and individual liberties with respect to personal data process in the public and private sectors. They include eight basic principles for data protection: 1. The collection limitation principle limits the collection of personal data and suggests lawful and fair means for collection as well as consent of the data subject where appropriate. 2. The data quality principle calls for the relevancy of personal data to the purposes for which they are to be used. It also calls for data accuracy, completion, and maintenance. 3. The purpose specification principle suggests that data controllers should specify the purpose for which the data are collected no later than at the time of data collection. Regulatory Readiness Assessment for Digital Trade 69 Subsequent use of the data should be limited to those purposes, and the data subject should be notified of any change of purpose. 4. The use limitation principle limits the use of the data for purposes other than those specified, with the consent of the data subject or by the authority of law. 5. The security safeguards principle calls for reasonable protection of the data from risks such as loss or unauthorized access, destruction, use, modification, or disclosure. 6. The openness principle suggests a general policy of openness regarding developments, practices, and policies regarding personal data. 7. The individual participation principle suggests that a data subject should have the right to request data from a data controller or a confirmation of whether the data controller has personal data relating to the individual. If the data controller has such data, they should be provided to the data subject within a reasonable time, in a reasonable manner, and in a form that is readily intelligible to the data subject 8. The accountability principle argues that the data controller should be held accountable for abiding with principles of the guidelines Kosovo has implemented an advanced and comprehensive regulatory and institutional framework for data protection. Its Law on the Protection of Personal Data, adopted in 2010, was replaced in 2019 by a new law that incorporates the main principles and provisions of the European Union’s General Data Protection Regulation (GDPR). The Law on Personal Data Protection covers all main regulatory areas of data protection: • Specific rules on sensitive personal data, such as political views, sexual orientation, medical history, religion, and ethnic origin, are essential to safeguard deeply personal value and prevent discrimination or other forms of misuse. Kosovo’s law covers these conditions, including by establishing special rules for the treatment of sensitive personal data during processing. All structural peers included in the review include specific remedies for sensitive personal data. • Basic principles for data regulation include the need to have a legitimate reason for collecting and processing personal data. The central requirement, recognized by all the regulations reviewed, is obtaining the consent of the data subject. In addition to consent, modern regulations offer additional basis for the collection and processing of data. Allowing for data to be transferred and processed on the basis of contractual obligations is an important tool for business to be able to outsource some of their data management needs, such as human resources, payroll, and consumer analytics to specialized service providers. The ability to collect and process data for public purposes is an essential legal basis for data collection that can override the need to seek consent for matters of public interest. For instance, during the COVID-19 pandemic, personal data collected through smartphones, especially geolocation and proximity to other individuals, proved useful in assessing risks and identifying potential outbreaks. Kosovo’s legislation covers all these essential legal bases for data processing. • The ability to retrieve one’s personal information, request its amendment, or demand its deletion is an essential right of data subjects. All the regulations reviewed require that personal data be stored in a manner that allows for the data subject’s exercise of the right to access the information and to request its correction or deletion if necessary. • Providing clear rules on the conditions for data to be transferred to other jurisdictions is essential to any data-driven businesses. All the regulations reviewed provide for such guidance. Kosovo follows the EU model of allowing transfers of personal data to jurisdictions that offer an “adequate level of protection.” Transfer of personal data to third countries not having adequate protection may be done upon authorization of the Information and Privacy Agency (AIP). The AIP is the main authority charged with policy making and regulation of personal data in Kosovo. It is an independent institution, with a commissioner to be elected by Kosovo’s Assembly. A commissioner has not yet been elected, limiting the effectiveness of the legislation (Data Guidance 2020). The agency’s mandate includes supervising the implementation of the Law on Personal Data Protection, receiving individuals’ complaints regarding suspected violations of personal data protection rights, and promoting public awareness of data privacy rights. The agency indicates that it is operating under severe budgetary constraints and has too few staff to allow all agency departments to operate as foreseen by the agency’s institutional charter. At the time of this assessment, the agency had not been able to conduct compliance inspections for three years (World Bank 2020b). 70 Regulatory Readiness Assessment for Digital Trade Given that Kosovo has Europe’s youngest population, awareness campaigns are likely to go a long way toward increasing the use of the Internet for commercial transactions. Sixty percent of individuals surveyed in Kosovo stated they had no concerns about their privacy and personal data protection (KAS 2021). This finding may be indicative of a lack of use of e-commerce channels or a lack of awareness of the risks posed by their use. Local lawyers report that consumers do not fully understand the importance of data privacy or the steps they need to take in case of a data breach, leading to few complaints reported to the agency. Local merchants reportedly do not take data protection rules seriously, often requiring the disclosure of sensitive information not necessary for the provision of their services and relying on staff nondisclosure agreements to protect this information. Recognition of Kosovo’s data protection regime as “adequate” could facilitate digital trade with the European Union. This decision from the European Commission would remove obstacles to transfers of personal data to and from Kosovo, reducing costs for Kosovo’s digital businesses. As Kosovo’s regime is aligned with the European Union’s GDPR and Kosovo is a potential EU enlargement country, the government is in a good position to seek a determination on “adequacy,” which would make Kosovo a GDPR–compliant country. Kosovo has not yet engaged in negotiations with the European Union to seek an adequacy determination. Cybersecurity Cybersecurity regulation is critical to promoting trust in digital markets. In 2015, the OECD declared digital risk an economic risk (OECD 2015b). The World Economic Forum ranks cyberattacks as comparable to natural disasters (WEF 2019b). In 2020, there was a 715 percent increase in ransomware, a 600 percent increase in Internet of Things (IoT) attacks, and a 151 percent increase in distributed denial-of-service (DDoS) attacks. Industry experts estimate that these attacks cost the global economy as much as US$1 trillion (Smith and Lostri 2020). Losses caused by cyberattacks include losses from disruption of critical government services (financial systems, infrastructure, health care); damage to reputation (undermining citizens’ trust in government and partners); unauthorized access to confidential information (national security, personal data); and loss of life (attacks on hospitals, nuclear power plants, water filtration systems, and so forth). In 2020, Italy’s Social Security website was attacked and forced to shut down the day people started applying for coronavirus assistance. In the United States, the 2020 Blackbaud ransomware attack is estimated to have affected two dozen healthcare providers and over 10 million patients. Major data breaches not only compromise people’s privacy, they can also have a chilling effect on digital markets, as consumers realize how vulnerable their information is. A secure network and information system is one in which systems can resist, at a given level of confidence, any action that compromises the availability, authenticity, integrity, or confidentiality of stored, transmitted, or processed data or related services offered by, or accessible via, those network and information systems.57 Security requirements consist of organizational and technical measures as well human resources. They may include mandatory encryption of personal data, implementation of rigorous internal policies, or the appointment of a data manager. Assessment of the risk to a data subject’s privacy helps determine the safeguards that need to be implemented (OECD 2013). Countries without adequate data protection regulations risk being avoided by companies (NBT 2015). They also miss out on the benefits of the Internet, such as innovation and economic growth (WEF 2016). The European Union’s GDPR, which went into effect in 2018, updated provisions to protect the personal data of EU citizens and established relevant cybersecurity requirements for data protection (table 5).58 57 See Directive (EU) 2016/1148 of the European Parliament and of the Council of 6 July 2016 concerning measures for a high common level of security of network and information systems across the European Union. 58 Other important international guidelines include the Convention on Cybercrime of the Council of Europe (CETS No. 185) (Budapest Convention) and Directive (EU) 2016/1148 of the European Parliament and of the Council of 6 July 2016 concerning measures for a high common level of security of network and information systems across the European Union (NIS Directive). The Budapest Convention is the only binding international instrument on this issue. It serves as a guideline for any country developing comprehensive national legislation on cybercrime and as a framework for international cooperation between state parties to this treaty. The NIS Directive is the first piece of European Union–wide cybersecurity legislation. Its goal is to enhance cybersecurity across the European Union. To do so, it establishes requirements for national cybersecurity capabilities, national supervision of critical sectors, and cross-border collaboration framework. Transposition of the NIS Directive is part of the ongoing accession process of the Western Balkan countries. Regulatory Readiness Assessment for Digital Trade 71 Table 6.  Cybersecurity requirements of the European Union’s General Data Protection Regulation (GDPR) Feature Description Security of processing Controllers and processors must ensure a level of security appropriate to the risk, through measures such as data pseudonymization and encryption. Breach notification Controllers must notify the supervisory authority within 72 hours of becoming aware of a personal data breach. If the breach is likely to result in high risk to an individual’s rights, the controller must notify the data subject of the breach without undue delay. Impact assessment Where data processing is likely to result in high risk to individuals’ rights, the controller must conduct an impact assessment before processing, including measures planned to address the risks. Designation of data Controllers and processors must designate a data protection officer under certain circumstances, including if the bulk protection officer of the processing activities require regular and systematic monitoring of data subjects on a large scale or consists of processing of sensitive data on a large scale. Kosovo has comprehensive cybersecurity rules related to personal data protection, through transposition of EU GDPR in 2019. Unlike most other digital regulations assessed in this review, cybersecurity rules have seen irregular adoption in the Western Balkans as well as in Europe. Kosovo stands out among structural and aspirational peers with top marks for cybersecurity regulation. Albania, Armenia, the Kyrgyz Republic, and North Macedonia have frameworks for cybersecurity that include some requirements to protect the user’s data, but they have left out substantial provisions designed to strengthen data security. Cybersecurity requirements related to data protection are embedded in Kosovo’s Law on the Protection of Personal Data (LPPD). They include administrative and technical controls to protect against accidental loss, destruction, or unauthorized access of data. Most countries in the region require only the adoption of an internal policy or the establishment of internal controls, whereas Kosovo has the most comprehensive requirements among structural peers. They call for data encryption under certain circumstances to prevent unauthorized access to the data, appointment of a data manager, procedures to assess the threats and risks to personal information, and notification of the data subject and/or the authorities in case of a data breach. Data breaches generally need to be reported to the AIP, which agency is legally empowered to impose fines for noncompliance, in line with GDPR provisions. Lack of budget and staff mean that Implementation of LPPD’s provisions, including those pertaining to cybersecurity, is severely constrained due to lack of budget and staff. Furthermore, despite Kosovo’s high Internet penetration, few government agencies or companies introduced good practices after the identification of cyber threats or risks. Because of status-related issues, Kosovo is not party to the major international instrument for fighting against cybercrime crime, the Convention on Cybercrime of the Council of Europe (CETS No. 185). Relevant provisions have been transposed, however. A section-by-section comparison prepared by the Council of Europe shows that all core components of the Budapest Convention have been codified into Kosovo’s cybercrime legislation, including the Law on the Prevention and Fight of Cybercrime. Procedural aspects of Kosovo’s cybercrime legislation are largely codified in its Criminal Procedure Code. According to the European Commission’s assessment, Kosovo’s legislation on cybercrime is generally in line with the EU acquis (EC 2020b). At the same time, in the view of several stakeholders consulted, including government officials and international partners, the cybercrime law addresses only a minimal set of cybercrimes and cyber- enabled criminal offences and needs to be revised to reflect technological advances and changes in criminal behavior. The government is working on a new comprehensive cybercrime law. It also hopes to overhaul the 2010 Law on the Prevention and Fight of Cybercrime. Kosovo has not yet enacted any overarching law concerning ICT security; the NIS Directive has not been transposed into Kosovo’s legal framework. The Law on Electronic Communications, adopted in 2012, addresses selected ICT security aspects, focusing narrowly on operators of electronic communications networks and service providers. Transposition of the NIS Directive has been pending for years. The European Commission has issued a proposal for an updated NIS Directive (NIS 2), which the European Union should adopt soon. Transposition of NIS 2 would provide the legal grounds for establishing national cybersecurity capacity requirements, including adequate resources for a national CERT team and critical infrastructure protection, including operators of essential services and digital service providers). According to the European Union Agency for Cybersecurity (ENISA), 82 percent of operators of essential services and digital service 72 Regulatory Readiness Assessment for Digital Trade providers find that the NIS Directive has a positive effect on their information security.59  The Ministry of Economy and Environment (MEE) has initiated and is in charge of the transposition process. Kosovo adopted the National Cybersecurity Strategy (NCS) 2016–2019 and established the National Cybersecurity Council (NCSC) and a national cyber-incident response unit of Kosovo (KOS-CERT). However, KOS-CERT faces a severe personnel shortage and was operated by just two staff members at the time of the drafting of this report. It receives a relatively small number of direct cybersecurity incident reports, which the team attributes to insufficient capacities of institutions to detect incidents. The implementation capacity of the NCSC is low, and an implementation review of the NCS has not yet been conducted. At the same time, the NCSC has initiated the process of preparing a new NCS. It is important to conduct an independent evaluation of the NCS 2016–2019 and draw on the lessons learned from it. It will also be important to conduct a rigorous cybersecurity risk assessment specific to conditions in Kosovo to inform the focus of a follow-on NCS. Adequate budgetary support to ensure full implementation of the NCS. Intermediary liability Intermediary liability refers to the responsibility of online intermediaries—search engines, application platforms, social networks, broadband companies—for third-party content featured in, or products and services offered through, their websites or apps. Intermediaries can be held ( jointly) liable for fake or faulty products or for services or offensive or illegal content transacted through or featured in their services—even though they usually lack full knowledge of everything producers and content developers offer.60 Rules on intermediary liability need to strike a balance between protecting consumer rights and supporting the expansion of digital markets, including through intermediary platforms. For digital intermediaries, responsibility may arise mainly from two types of conduct: the offering for sale of counterfeited products and the publication of unlawful content by users. The offering of fake products would normally entail a violation of intellectual property rules (typically trademark protection). Unlawful content can run against intellectual property rules when the content unduly features other people’s work (a violation of copyright protection). It can also violate criminal law, such as rules against libel, hate speech, or child pornography; the protection of individual privacy or classified information; or lèse-majesté crimes. Rules on online intermediary liability usually include two components: one attributing responsibility to the intermediary and another reducing its liability if it takes action against the violation (“safe harbor”). For example, an intermediary would be held liable if it had knowledge that the product being offered was fake, but it could be exonerated from responsibility if it took steps to remove the product from its listings upon learning of the violation. Intermediaries can be assigned no responsibility; they can be deemed to have had actual knowledge of the infringement (the platform knew the content was unlawful) or “duty of knowledge” (the platforms should have known that the content was unlawful); or they can be assigned absolute responsibility (the platform is responsible in all conditions). Safe harbor provisions typically involve notice and take-down procedures, which require that upon receipt of a notice regarding infringing content, the intermediary search and remove all copies of the infringing content and ensure that it is not uploaded again. Rules on liability for digital intermediaries are nascent and evolving. Even within countries, views on the extent of liability that should be imposed on intermediaries varies greatly. Much of this tension is seen in the Unites States, home to some of the largest Internet firms as well as content developers, which provides strong protections for digital intermediaries (Holland and others 2014). Content industry representatives claim that the lack of intermediary responsibility leads to an increase in online piracy and decreased revenue for content industries. The American Association of Publishers advocates for sanctions on intermediaries for failing to ensure the protection of copyrighted material (USITC 2017). Internet industry representatives argue that an increase in intermediary liability is likely to increase costs and limit intermediaries’ ability to combat piracy (USITC 2017). The US Digital Millennium Copyright Act (DMCA) creates a safe harbor for intermediaries under certain circumstances, including situations in which they unknowingly display, transmit, or store infringing content. Section 230(c) of the Communications Decency Act shields intermediaries from liability for most third-party content. However, when it comes to copyright infringement, they must meet certain conditions, including a notice and takedown requirement. The European Union released 59 See the NIS Investments report, which is based on a survey of 251 organizations of operators of essential services and digital service providers from France, Germany, Italy, Spain, and Poland. 60 Regulatory Readiness Assessment for Digital Trade 73 a draft directive in 2016 that requires that intermediaries routinely check that they do not host infringing content. Seeking to protect online freedom of expression, an international coalition released the Manila Principles for Intermediary Liability (box 2). They provide governments with standards for censorship and takedown laws that respect the users’ rights while promoting innovation. Box 2. The Manila Principles for Intermediary Liability The Manila Principles for Intermediary Liability were developed to protect online freedom of expression and to provide governments with standards for censorship and takedown laws that respect users’ rights. The effort involved civil society groups from around the world, led by the Electronic Frontier Foundation (United States), the Centre for Internet and Society (India), Article 19 (United Kingdom), KICTANET (Kenya), Derechos Digitales (Chile), the Asociación por los Derechos Civiles (Argentina), and Open Net (Republic of Korea). The six proposed principles are as follows: Intermediaries should not be liable for third-party content: Intermediaries should be exempt from liability for third-party content that they did not modify, and they must not be required to routinely monitor content on their network or platform. An order by a judicial authority must be required to restrict content. Requests for restrictions of content must be clear and unambiguous and follow due process: Where an intermediary receives a restriction request before a court order is issued, it need not evaluate the legality of the content. The request must include its legal basis. Sanctions should be imposed for bad faith restriction requests. Laws and content restrictions orders and practices must comply with necessity and proportionality tests: Restrictions should be specific to the content at issue, limited in geographical scope, and not extend beyond its duration. Laws and content restriction policies and practices must respect due process: Parties must be provided the right to be heard and to appeal restriction orders. Transparency and accountability must be built into laws and content restriction policies and practices: Applicable rules and transparency reports must be published online in a timely manner. Source: Stanford University n.d. At the international level, some principles on intermediary liability were included in recent trade agreements. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP) and the United States, Mexico, and Canada Agreement (USMCA) set limits on intermediary liability by ISPs in their intellectual property chapters. ISPs are not liable for copyright infringements “that they do not control, initiate, direct, and that take place through systems or networks controlled or operated by them or on their behalf.” However, they must remove or disable access to copyright infringing content on their networks upon obtaining knowledge of its existence. Intermediary liability rules relating to criminal or civil infringement laws are being modernized for the digital environment. The proliferation of fake news in recent years has led countries to seek to reduce the amount of misinformation citizens can find online. Doing so raises concerns about content filtering, freedom of speech, and media manipulation, however. Singapore has recently introduced the Protection from Online Falsehoods and Manipulation to hold social media sites liable for third-party content published on their platforms. Noncompliant platforms are subject to fines and imprisonment if they do not remove “misinformation” or publish “corrections” next to it. Industry groups fear that this new type of law allows governments to decide what is true or false, endangering freedom of expression and speech. Following a terrorist attack at a mosque in New Zealand, which was streamed live on Facebook, Australia passed a bill requiring social media platforms to promptly remove abhorrent violent user content shared on their sites. The acts covered by the new law include murder, torture, rape, and kidnapping. Other countries, including France and Germany, are also tackling these issues through legislation. Intermediary liability rules are the least developed segment of Kosovo’s digital regulations. Its Law on the Information Society Service includes a chapter on the conditions for liability of different types of digital services providers. The law builds on the EU E-Commerce Directive of 2000, providing a framework for the conditions of liability of telecom infrastructure operators that only transmit data through their networks (“mere conduit”) or store data temporarily for the effectiveness of the transmission (“caching”) and “hosting” services providers that store information 74 Regulatory Readiness Assessment for Digital Trade provided by third parties, including intermediaries such as e-commerce or content platforms. This framework is a key step in increasing transparency about the rules on intermediary liability, as it provides clarity on the applicable rules. In line with international best practice, Kosovo’s legal framework provides a safe harbor” for platform services such as digital platforms. The regulation provides a channel for digital platforms to be exempt of liability for unlawful material uploaded by third parties. “Hosting” providers are exempt from wrongdoing if they lack knowledge of infringing content or remove the material upon acquiring knowledge of its existence. This conditional exclusion of liability is in line with modern international practices, as it seeks to strike a balance between the liberty of the intermediary to allow third parties to exchange information and views and the responsibility to avoid unlawful content. Under this framework, for example, a video–sharing platform like YouTube or Vimeo would not be immediately responsible for a video featuring, say, hate speech, if it took action to remove it once it was informed of its existence. Similarly, an e-commerce platform would be liable for the sale of illegal drugs by a vendor only if it failed to block it once it came to its knowledge. This is the approach adopted by the EU regulations and the EU members states. The framework offers only a limited solution for e-commerce, however, as the liability limitation does not explicitly cover intellectual property. The chapter on intermediary liability does not define illegal activity or content. As a result, digital intermediaries can be found fully liable ( jointly with the third party) for content that infringes on intellectual property rights, such as copyright for video or text, or trademarks for counterfeit protects. This is a key aspect for content platforms (YouTube) or social media (Facebook) or smaller local social platforms, which depend on content uploaded by third parties and may find themselves liable for violations incurred by their users. Kosovo could replicate the approach taken by North Macedonia, which addresses intermediary liability without excluding these matters from the scope of the law. Although this was reportedly taken into account by the e-commerce draft law drafted by the Ministry of Trade, the status of this law is uncertain. Furthermore, according to the European Commission’s 2020 Kosovo Report, there is a need for capacity building and awareness raising regarding intellectual property rights. Stakeholders also point to the lack of courts for intellectual property cases and a shortage of local specialists to assist in relevant cases. The law could include a requirement to restrict illegal content upon an order from a judicial authority, which would prevent arbitrary orders and overreach from the government. Vibrant digital markets require conducive regulatory frameworks. Regulation can provide the legal tools necessary for remote contracts, clarify the rights and obligations of the multiple actors involved in digital transactions, and establish a framework that promotes consumer trust in digital markets, even when the consumer does not know the merchant, or the merchant is in a different country. A number of regulatory and institutional initiatives would help foster digital trade and e-commerce by increasing trust in digital transactions. Some specific recommendations resulting from the analysis are presented here. Policy recommendations for improving the legal framework and its implementation Electronic documents and signatures • Ensure implementation of the Law on Electronic Identification and Trust Services in Electronic Transactions, which would increase flexibility, reduce transactions costs, and facilitate remote contracts in the region by ensuring mutual recognition. • Establish an agency/unit tasked with issuing digital certificates and certifying trust service providers, in order to ensure implementation and enforcement of the law. • Provide capacity building for the judicial branch and awareness campaigns for the public, to ensure that all actors have the knowledge and skills they need to trust e-signatures. Online consumer protection • Adopt an online dispute-resolution mechanism. Update the Law on Consumer Protection or adopt an e-commerce law to provide the option to resolve cross-border claims through an online platform. Regulatory Readiness Assessment for Digital Trade 75 Data protection • Strengthen institutional capacity in order to seek EU recognition of Kosovo’s data protection regime as “adequate,” in order to facilitated digital trade. • Appoint a data protection commissioner. • Increase public awareness of data protection rules and relevant institutions, in order to increase trust in and use of e-commerce channels. Cybersecurity • Allocate budget to strengthen the capacity of the NAPPD, to ensure implementation of the Law on the Protection of Personal Data. • Transpose NIS Directive and consider the NIS 2 Directive proposal. • Update the Law on the Prevention and Fight of Cybercrime to reflect technological advances and related changes in criminal behavior. • Allocate budget to ensure implementation of cybersecurity strategic plans. • Amend the Law on the Information Society Service to expand the scope of intermediary liability rules to intellectual property rights, as other European countries, including Croatia, Montenegro, North Macedonia, and France, have done. 76 Regulatory Readiness Assessment for Digital Trade References Abugattas, Luis, Shqipe Jashari Sekiraqa, and Xhorxhina Bami. 2020. Act nr. 2.2.8 - Kosovo’s Trade in Services With The EU and CEFTA Member Countries. 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Western Balkans Regular Economic Report. 2021. https://openknowledge.worldbank. org/bitstream/handle/10986/36402/Greening-the-Recovery.pdf?sequence=1&isAllowed=y WTO (World Trade Organization). n.d. WTO Accessions: Expanding World Trade and Strengthening WTO Rules.https://www.wto.org/english/thewto_e/20y_e/acc_brochure2015_e.pdf. Regulatory Readiness Assessment for Digital Trade 79 Appendix A Methodology and Definitions For comparison purposes, this chapter adopts the World Bank’s Exporter Dynamics database criteria and methodology to assess exporting dynamics. The following exporting demographic events are defined: Exportert: a firm that exports in year t Entrantt: a firm that does not export in year t –1 but exports in year t Exitert: a firm that exports in year t –1 but does not export in year t Incumbentt: a firm that exports in both years t –1 and t Second-year incumbentt: a firm that exports in years t –1, t, and t +2 First-year surviving entrantt: a firm that does not export in year t –1 but exports in both years t and t+1 Second-year surviving entrantt: a firm that does not export in year t –1 but exports in years t, t + 1, and t + 2. Regions and income levels are as defined based on the World Bank classifications. Kosovo Customs data display export values in current euros, the legal currency in the country. To ensure cross-country comparability, values are converted into US dollars using the monthly average exchange rate between the euro and the US dollar. Figures are then aggregated into annual values. Harmonized System (HS) nomenclature varies over time, as it was updated in 2017. To provide robust and sound statistics, HS products from 2017 onward were translated into the HS2012 classification, to ensure comparability of products over time, using classifications and correspondence tables from the United Nations. Table A.1  Exporting premia in Kosovo Item Total factor Value- Sales per Employment Wage per Capital per Investment Credit productivity added per worker worker worker access worker                   Firm exports goods 0.055*** 0.514*** 0.714*** 1.185*** 0.156*** 0.134** 0.120*** 0.029***   (0.005) (0.026) (0.016) (0.016) (0.006) (0.063) (0.005) (0.006) Firm exports services 0.076*** 0.619*** 0.574*** 0.591*** 0.185*** 0.054 0.129*** 0.030***   (0.010) (0.045) (0.026) (0.024) (0.012) (0.099) (0.009) (0.009) Log employment 0.054*** 0.007 0.239*** 0.178*** 0.047*** 0.191*** 0.108***   (0.002) (0.009) (0.004)   (0.002) (0.018) (0.001) (0.001) Log turnover per               0.060*** worker   (0.001) Constant 2.223*** 9.028*** 8.246*** 1.375*** 7.598*** 6.178*** 0.297*** –0.672***   (0.014) (0.115) (0.175) (0.379) (0.156) (0.203) (0.109) (0.100)                   Year effects Yes Yes Yes Yes Yes Yes Yes Yes Industry fixed effects No No Yes Yes Yes Yes Yes Yes (four-digit) Industry fixed effects Yes Yes No No No No No No (sector) Geographic fixed Yes Yes Yes Yes Yes Yes Yes Yes effects (municipality) Sector All All All All All All All All                   R-squared 0.92 0.09 0.32 0.27 0.29 0.34 0.38 0.16 Observations 9,180 14,910 116,897 116,897 115,364 10,729 116,897 116,897 Source: Data from the Kosovo Customs Database and the Kosovo Tax Registry. 82 Methodology and Definitions Note: Robust standard errors are in parentheses. The excersice regresses each outcome variable (column) on two dummy variables that classify firms according to their exports and on the log of employment to control for firm’s size. The first dummy variable equals 1 if the firm is an exporter of goods and 0 otherwise; the second follows the same criteria for exporters of services (baseline category is nonexporters). The specification controls for year effects; industry fixed effects (four-digit of NACE Rev. 2, except for total factor productivity revenue (TFPR) and value added per worker (macro level); and geographic fixed effects (municipality level). Dependent variables enter in logs, except for investment and credit access, which equal 1 if the firm invested/accessed credit and 0 otherwise. * = 10 percent, ** = 5 percent, *** = 1 percent. Table A.2  Relationship between productivity and the number of destinations served and products exported Item Number of destinations Number of products (HS six-digit) Ordinary least Fixed effects Ordinary least Ordinary least Fixed effects Ordinary least squares (2) squares squares (2) squares (1) (3) (3) (1)               Log labor productivity 0.160*** 0.140*** –0.011 0.616*** 0.426*** –0.112   (0.015) (0.030) (0.015) (0.110) (0.114) (0.111) Log exported value     0.344***     1.454***   (0.012) (0.154) Incumbent 1.040*** 0.365*** 0.416*** 3.894*** 1.319*** 1.282***   (0.036) (0.060) (0.036) (0.395) (0.332) (0.303) Entrant 0.221*** 0.086 –0.001 0.874*** 0.087 –0.063   (0.035) (0.057) (0.036) (0.269) (0.278) (0.280) Exiter ––0.823*** –0.338*** –0.364*** –2.743*** –0.637*** –0.847**   (0.036) (0.033) (0.033) (0.435) (0.212) (0.355) Age 0.009** 0.082*** 0.016*** 0.000 0.040 0.030   (0.004) (0.018) (0.003) (0.025) (0.111) (0.025) Log wage per worker     0.253***     0.984***   (0.033) (0.304) Constant –0.631*** –0.340 –4.402*** –7.284*** –0.919 –22.526***   (0.230) (0.375) (0.339) (1.906) (1.419) (3.960)               Industry fixed effects Yes Yes Yes Yes Yes Yes (four-digit) Municipality fixed Yes Yes Yes Yes Yes Yes effects Time effects Yes Yes Yes Yes Yes Yes Firm fixed effects No Yes No No Yes No               R-squared 0.32 0.08 0.45 0.13 0.01 0.17 Observations 7,549 7,586 7,505 7,549 7,586 7,505 Source: Data from the Kosovo Customs Database and the Kosovo Tax Registry. Note: Robust standard errors are in parentheses. Dependent variables are all in levels, unless otherwise stated. Labor productivity (in log) is defined as sales per worker, in order to maximize the sample size. Incumbent, entrant, and exiter are dummy variables that define firm status in foreign markets. The baseline category is entrance and exist into the activity the same year. Age is defined as the number of years after the firm’s registration date. Industry fixed effects are at the four-digit level of the NACE. * = 10 percent, ** = 5 percent, *** = 1 percent. Methodology and Definitions 83 Firm, Product, and Destination Dynamics Survival analysis Many factors may drive the likelihood of survival in a new market. Therefore, the analysis replicates Cadot and others (2011), who define firm f as exporting to a new combination of product p and destination d at year t if the same firm was already an exporter but had not exported that p-d combination the year before. The second step is to define market survival. A new ( f,p,d,t) combination survives if it is active the year after entry (not incorporating the spell length). As this definition is categorical, a survival dummy variable equals 1 if the combination ( f,p,d,t) survives in the market and 0 if the quartet is not present the year after entry. The criteria for classifying the quartet survival are consistent with previous definitions adopted for firm, product, and destination survival. The sample is restricted to 2014–18, because data availability do not allow distinguishing new ( f,p,d,t) combinations in 2013, and it is too early to analyze market survival of combinations that entered in 2019. Although market survival is low, the survival threshold preserves a relatively large sample. Moreover, market survival increases steadily after the entry year, so understanding what drives market survival immediately after entry is key for export-oriented trade policies. Following Cadot and others (2011), we estimate the following probit model: Pr(sfpdt= 1) = ∅(prodftδ + Xfpdtβ’ + creditftω + fdidtγ + gdpdtπ + αi + αd + αt + εfpdt), (1) where is a measure of firm f productivity (sales per worker) in the year of reference t, Xfpdt is a vector of explanatory variables describing firm exporting behavior, and creditft is a dummy variable that equals 1 if the firm accesses credit in the year of reference and 0 otherwise. The vector Xfpdt includes proxies for market attractiveness, agglomeration, and firm exporting scale. Measures are as follows: ηpdt is the number of firms exporting product p (six-digit level) to destination d in year t. σfpt is the number of destinations served by firm f exporting product p. λfdt is the number of products p that firm f exports to destination d. ξdt is the number of product-firm combinations active in the bilateral trade relationship between Kosovo and destination d. φfpdt is the export value of firm f of product p to destination d at entry. ψfp is the share of product p in firm f ’s total export value. The first five measures enter the equation in logs; the last is measured as a percentage. Origin- destination pairs are at the country level. Equation (1) also controls for a set of controls at the product, destination, and year level. The variable gdpdt is the log of GDP per capita of destination d at time t, and fdidt is the net FDI flows from destination d to Kosovo in year t. The CBK reports net FDI flows to Kosovo annually for the top 29 countries, capturing approximately 90 percent of total net flows. Countries with larger FDI flows also display solid cultural and trading linkages. Thus, the analysis assumes that net FDI flows from the remaining destinations with weak trading and cultural links to Kosovo are negligible. Additionally, in equation (1), αi controls for product fixed effects at the two-digit level of HS, αd for destination fixed effects (at the country level), and for cohort time effects. Some regressions add industry’s fixed effects (at the two-digit NACE level), as the type of good traded may differ from the firm’s main economic activity. Table A.3 reports four specifications of the marginal effects of equation (1). Reporting marginal effects rather than original estimated coefficients helps explain regression outcomes. Standard errors (shown in parentheses) are robust to heteroskedasticity and correlation and clustered at the product-destination level. 84 Methodology and Definitions Table A.3  Determinants of survival after the entry year (marginal effects) Dependent variable: Market survival Item (1) (2) (3) (4)           Log labor productivity (sales per worker) 0.026*** 0.026*** 0.026*** 0.025***   (0.003) (0.003) (0.003) (0.004) Log number of firms exporting product p to a destination d (ηpdt) 0.046*** 0.045*** 0.045*** 0.049***   (0.004) (0.004) (0.004) (0.004) Log number of destinations to which firm f exports product p (σfpt) 0.166*** 0.162*** 0.161*** 0.154***   (0.006) (0.006) (0.006) (0.007) Log number of products that firm f exports to destination d (λfdt) 0.040*** 0.043*** 0.043*** 0.045***   (0.003) (0.003) (0.003) (0.003) Log number of product-firm combinations active in bilateral trade with –0.049*** –0.050*** –0.058*** –0.060*** destination d (ξdt) (0.018) (0.018) (0.019) (0.021) Log initial value of firm f export spell (φfpdt) 0.043*** 0.042*** 0.042*** 0.042***   (0.002) (0.002) (0.002) (0.002) Share of product p in firm’s overall export sales (ψfp)   0.039*** 0.039*** 0.042***     (0.014) (0.014) (0.014) FDI net flow (millions of US$)       0.001**       (0.000) Credit access in year t       0.015**       (0.007) Log GDP per capita (purchasing power parity)     –0.122 –0.141       (0.128) (0.130)           Origin-destination fixed effects Yes Yes Yes Yes Product fixed effects (two-digit HS) Yes Yes Yes Yes Industry fixed effects (two-digit NACE) No No No Yes Time effects Yes Yes Yes Yes           Observations 19,033 19,033 19,028 18,819 Source: Data from the Kosovo Customs Database, the Kosovo Tax Registry, and the Kosovo Credit Registry. Note: Robust standard errors are clustered at the product-destination level. is a measure of firm productivity (sales per worker) in the year of reference. FDI net flows are net FDI flows from country d to Kosovo. Credit access is a dummy variable that equals 1 if the firm accesses credit in the year of reference and 0 otherwise. Each specification includes proxies for market attractiveness, agglomeration, and exporting scale. controls for product fixed effects at the two-digit level of HS, for destination fixed effect (at the country level), and for cohort time effects. In column (4), is added to control for firm f’s main economic sector of operations. * = 10 percent, ** = 5 percent, *** = 1 percent. Assessing networks effects The analysis explores whether the source of the spillover is informational or financial. Following Cadot and others (2011), the regression include measures of churning and credit dependence at the product level. The churning variable is calculated as the average net firm entry rate at the six-digit HS level (equation 2). The firm’s trading product p net entry rate is used as a proxy for the information new ventures may have at the time of assessing their chances of success in a new market, either because foreign customers already know the type and quality of products exported or because they understand that if other companies enter that market, they can do so as well. Methodology and Definitions 85 ∑t New exporterspt ∑tExporters exitingpt Net Entry ratep = Entry ratep - Exit ratep = - (2) ∑tExporterspt ∑tExporterspt Alternatively, there may be a financial source for the spillover. Less than a third of registered firms in Kosovo access credit each year. Financial constraints are a barrier to growth and may be limiting exporting. However, if there are a minimum number of firms that are already exporting product p, financial institutions may accept the requests for loans by firms that are trying to sell the same product abroad, as they understand that the risk of the new∑ venture ∑tit is lower than New exporters would have Exporters exitingpt t pt Net exports been if no other firm product Entry rate = p. Hence, Entry rate - the Exitmeasure rate = of financial dependence is the average p p p credit-to-turnover ratio of those firms exporting product p. Equation ∑tExporters 3 shows ∑tExporters pt how the indicator ispt computed: ∑t∑f∈Ploansfpt Average credit - to - turnover ratiop = (3) ∑t∑f∈Pturnoverfpt Equation (3) computes the average credit-to-turnover ratio of firms selling product p abroad. The loan-to-turnover ratio is a proxy for credit dependence—that is, how many credit units are necessary to produce one unit of sales. As the coefficient in the regression aims to capture a financial spillover, equation (3) computes the ratio at the product level (six-digit HS). Table A.4 reports the regression results. Constant and time-invariant variables are suppressed. Both the net entry rate (ϱp ) and credit dependence (υp ) enter the equation interacting with ηpdt. Hence, ϱp*ηpdt and υp*ηpdt are the interactions between the (log) number of firms exporting product p to destination d in year t and the net entry rate and the credit dependence, respectively. Table A.4  Network effects  Item (1) (2) (3)         Log labor productivity 0.025*** 0.026*** 0.025*** (0.004) (0.004) (0.004) Log number of firms exporting a product p to a destination d 0.037*** 0.044*** 0.030***   (0.013) (0.007) (0.007) Log number of destinations to which firm f exports product p 0.152*** 0.152*** 0.153***   (0.007) (0.007) (0.007) Log number of products that a firm f exports to destination d 0.045*** 0.045*** 0.045***   (0.003) (0.003) (0.003) Log number of product-firm combinations active in bilateral trade with –0.059*** –0.059*** –0.060*** destination d   (0.021) (0.021) (0.021) Log initial value of firm f export spell (product HS6 to destination) 0.043*** 0.043*** 0.043***   (0.002) (0.002) (0.002) Share of product p in firm’s overall export sales 0.043*** 0.043*** 0.042***   (0.014) (0.014) (0.014) Log GDP per capita (purchasing power parity) –0.166 –0.170 –0.146   (0.129) (0.129) (0.129) FDI net flow (millions of US$) 0.001** 0.001** 0.001**   (0.000) (0.000) (0.000) Firm access credit in year t (Yes = 1,No = 0) 0.011 0.012* 0.013*   (0.008) (0.007) (0.007) Credit dependence of HS6 0.018   (0.019) Credit dependence (HS6)* log of number of firms exporting a product p to 0.062 0.078* a destination d   (0.043) (0.041) 86 Methodology and Definitions  Item (1) (2) (3) Product net entry rate (HS6) 0.189*** 0.188***   (0.030) (0.030) Net entry rate (HS6-product) * log of number of firms exporting a product 0.006 0.005 0.102*** p to a destination d   (0.034) (0.035) (0.033)         Origin-destination fixed effects Yes Yes Yes Product fixed effects (two-digit HS) Yes Yes Yes Industry fixed effects (two-digit NACE) Yes Yes Yes Time effects Yes Yes Yes         Observations 18,819 18,819 18,819         Source: Data from the Kosovo Customs Database. Note: Robust standard errors are clustered at the product-destination level. is a measure of firm’s productivity (sales per worker) in the year of reference. FDI net flows (in million US$) are FDI net flows from country d to Kosovo. Credit access is a dummy variable that equals 1 if the firm accesses credit in the year of reference and 0 otherwise. Each specification includes proxies for market attractiveness, agglomeration, and firm’s exporting scale. controls for product fixed effects at the two-digit level of HS, are destination fixed effects (at the country level), and are cohort time effects. Credit dependence is the credit-to-turnover ratio of firms selling product p abroad. the net entry rate is the entry minus the exit rates of firms at the product level. * = 10 percent, ** = 5 percent, *** = 1 percent. Entry to regions outside the Western Balkans The analysis also examines how exporting to Western Balkan countries affects entering other regions. A firm f enters a new region if it exports a product p to region d in year t and it did not export the same product to the same destination in the year before. As only observe traded volumes are observed, we assume that, conditional on exporting product p in year t, entering or not entering a regions outside the Western Balkans with the same product is a firm’s choice; entering a region outside Western Balkans in year t with a given product that the firm already exports is a contemporaneous decision. The outcome variable, market entry, is thus a dummy variable that equals 1 if the firm enters region d with product p and 0 otherwise. The main benefit of this approach is that it enables classifying all possible destination regions. The sample is restricted to the period when the firm is active and to the products the firm exports in a given year. For instance, if firm d starts exporting t-shirts to the European Union in year t, we consider not entering Latin America and the Caribbean (LAC) as part of the company’s decision. Thus, market entry would equal 1 for the t-shirt–EU combination and 0 for the t-shirt–LAC pair. If the same firm exports only t-shirts in year t, we restrict the analysis to the active products shipped. We construct the variable of interest (whether the firm exported to a Western Balkan country before entering a new market) in two ways. The first is a dummy variable that equals 1 if the firm exported to a Western Balkan country the previous year and 0 otherwise. The second tracks the company’s historical records. It equals 1 if the firm exported to a Western Balkan country the same year or any time before entering the new market and 0 otherwise. We estimate the following model: Pr(efpdt = 1) = ∅(Θftα’ + exportWEBAftω + Xfpdtβ’ + αi + αd + αt + αt * αd + εfpdt) where Θft is a vector of firm f ’s time-varying characteristics, such as labor productivity, firm size, and credit access; Xfpdt is a vector containing measures of market attractiveness and agglomeration; αd controls for region d fixed effects; αi controls for product fixed effects (two-digit HS); and αt are time effects. Table A.5 presents the results. Methodology and Definitions 87 Table A.5  Export to countries outside the Western Balkans Dependent variable: Market entry (product-region level) Item Ordinary least squares Ordinary least squares Probit (1) (2) (3)         Log labor productivity 0.007 –0.010*** 0.003   (0.008) (0.003) (0.009) Log employment 0.003 0.001 0.004   (0.008) (0.003) (0.009) Firm access credit 0.031* 0.022*** 0.045**   (0.018) (0.008) (0.019) Number of years exporting –0.028*** –0.117*** –0.027***   (0.010) (0.004) (0.010) Firm exported to Western Balkans in t–1 0.280***   0.233***   (0.027)   (0.024) Firm exported to Western Balkans in the past   0.038***       (0.009)   Log number of firms exporting a product p to a region d –0.009 –0.051*** –0.008   (0.008) (0.003) (0.009) Log number of products that a firm f exports to region d –0.046*** –0.010*** –0.061***   (0.007) (0.003) (0.008) Log number of regions to which firm f exports product p 0.095*** –0.114*** 0.122***   (0.024) (0.013) (0.024) Log number of product-firm combinations active in bilateral trade with –0.246 –0.202*** 0.039 region d   (0.198) (0.070) (0.183) Constant 0.432 0.944***     (0.320) (0.206)           Product fixed effects (HS two-digits) Yes Yes Yes Region fixed effects (subregion) Yes Yes Yes Region*Year effects Yes Yes No Year effects Yes Yes Yes         R-squared 0.261 0.200 — Observations 2,569 10,505 2,465 Source: Data from the Kosovo Customs Database. Note: Robust standard errors are clustered at the product-destination level. * = 10 percent, ** = 5 percent, *** = 1 percent. 88 Methodology and Definitions Access to credit analysis Table A.6 presents the regression results on the relation between credit access and exporting behavior. A dummy variable (1 if the firm has credit access, 0 otherwise) is regressed on a set of firm characteristics (labor productivity, export value, size, age, and capital intensity) and another set of measures that proxy exporting performance (number of countries served and products exported, and destination-product combinations active at the firm level). In addition, time effects and industry, product, and geographic fixed effects are included in all specifications. Table A.6  Credit access by exporters   Credit access Log disbursed loan amount    Item Ordinary least Fixed effects Probit Ordinary least Fixed effects squares (2) (3) squares (5) (1) (4)             Log labor productivity (sales per worker) 0.066*** 0.066*** 0.195*** 0.312*** 0.141**   (0.006) (0.013) (0.019) (0.031) (0.071) Log export value (US$) ––0.008** –0.010* –0.018 –0.013 0.005   (0.004) (0.006) (0.011) (0.016) (0.024) Log number of countries the firm serves 0.064*** 0.033 0.198*** 0.211*** 0.176*   (0.019) (0.023) (0.058) (0.079) (0.093) Log number of products the firm exports 0.065** 0.082** 0.218** 0.220* 0.119   (0.030) (0.033) (0.092) (0.115) (0.133) Log firm’s product-destination pairs active –0.090*** –0.082** –0.290*** –0.323** –0.213   (0.032) (0.036) (0.099) (0.127) (0.144) Log employment 0.095*** 0.252*** 0.295*** 0.785*** 1.022***   (0.005) (0.072) (0.017) (0.024) (0.311) Log capital per worker –0.006 0.143* –0.018 0.137*** 0.682**   (0.005) (0.073) (0.014) (0.023) (0.307) Age 0.010*** 0.057*** 0.028*** 0.007 0.185***   (0.001) (0.005) (0.004) (0.005) (0.026) Constant –0.491** –2.816*** –2.983*** 3.295*** –4.092   (0.248) (0.985) (0.670) (0.609) (4.287)             Industry fixed effects (two-digit NACE) Yes Yes Yes Yes Yes Exported product fixed effects (two-digit HS) Yes Yes Yes Yes Yes Geographic fixed effects (municipality) Yes Yes Yes Yes Yes Time effects Yes Yes Yes Yes Yes Firm fixed effects No Yes No No Yes             R-squared 0.18 0.10   0.45 0.09 Observations 6,892 6,945 6,834 4,077 4,111             Source: Data from the Kosovo Customs Database, the Kosovo Tax Registry, and the Kosovo Credit Registry. Note: Robust standard errors are in parentheses. Dependent variables are credit access (Yes = 1, No = 0) and the (log) disbursed loan amount of those firms that access to credit. Labor productivity (in log) is defined as sales per worker, in order to maximize the sample size. Export value (log) is the value of exports in the year of reference. Age is defined as the number of years since the firm’s registration. Industry fixed effects are at the four-digit level of NACE. Industry and exported product fixed effects are at the two-digit level of NACE and HS, respectively. Geographical fixed effects are at the municipality level. * = 10 percent, ** = 5 percent, *** = 1 percent. Methodology and Definitions 89 Appendix B Sector Stakeholders The Ministry of Economy is responsible for policy in the ICT sector, including broadband. The Electronic and Postal Communications Authority (ARKEP) is the sector regulator for electronic communications, including broadband. Together they implement the Law on Electronic Communications, the primary law governing the sector. ARKEP has the power to adopt regulations that implement the law. Table B.2 identifies the roles of the major stakeholders in the digital sector. Table B.1  Major stakeholders in the digital economy sector Stakeholder Description Ministry of Economy Responsible for developing telecommunications (including broadband) policies and medium- and long- term strategies for the sector. Electronic and Postal Communication Independent authority, appointed by Parliament, with well-defined regulatory objectives and Regulatory Authority (ARKEP) competencies, including regulating telecommunications and administering the Law on Electronic Communications. Independent Media Commission (IMC) Regulatory authority in the field of audio and visual broadcasting programs and related services. Kosovo Telecom (KT) Kosovo’s incumbent operator and the largest mobile company (via Vala brand) in Kosovo. KT is wholly state owned. Attempts to privatize the company in 2011 and 2012 fell through. Although there has been interest from prospective buyers, public and political opinion is against the sale of the company. Mobile operators Kosovo has three mobile operators: Vala (KT), IPKO (owned by Telecom Slovenia), and MTS (owned by Telecom Serbia). MTS was issued a limited, temporary concession to offer mobile services within Kosovo in 2016 as part of an EU–brokered deal. Under the agreement, it was granted permission to operate legitimately in Kosovo—where it has long provided services unofficially via base stations near the border— in exchange for Serbia dropping its opposition to Kosovo being allocated its own international direct dialing code. Internet service providers IPKO, Kujtesa, Artmotion, Orange Net, TK, and Telcomm are among the largest alternative operators, together controlling about 86 percent of the of fixed broadband market measured by subscribers. The three largest operators—IPKO, Kujtesa, and Artmotion—each controls more than 20 percent of the market. Incumbent operator TK controls about 8 percent. Electricity transmission system operator KOSTT is a state-owned, legally unbundled company that operates Kosovo’s electricity transmission (KOSTT) system and performs central dispatching of the electricity loads; it is also a market operator. KOSTT possesses a 1,109-kilometer long fiber-optic network, which was commercialized in 2017. Source: Data from the Ministry of Economy, ARKEP, and TeleGeography. Length of KOSTT’s fiber-optic network is from World Bank 2019. 92 Sector Stakeholders WORLD BANK GROUP Boosting Exports Kosovo Country November 2021 Economic Memorandum