Transforming Kosovo – Seeking a Balance between Market Discipline and Political Stability ANDREAS WITTKOWSKY* 1. Rent-seeking in Transforming Economies and the Transformation of Rent-seeking Defined as broadly as possible, rent-seeking is an activity that aims to cre­ate income opportunities through political interventions while bypassing or eliminating market competition. In contrast to rent-seekers, profit­seekers realize their income through competitive behavior in conformity with market rules. There are various forms of rent-seeking. While the ultimate goal of transformation/transition is a system that largely eliminates rent-seeking, it is important to recognize that during the transition process rent-seeking opportunities go through several stages. For analytical purposes, one can roughly differentiate between four stages: ̈ Stage 1: The socialist economy, while ideally characterized by economic planning, in practice developed various forms of»market substitutes« that made it possible to overcome the shortages experienced by social­ist enterprises. Analysts of the Soviet economy spoke of an»adminis­trative market« which was largely based on – increasingly complex – barter chains. In contrast, Yugoslavia tried to officially integrate mar­ket elements into its economy relatively early. In the socialist economy, rents were realized mainly through the differences between adminis­tered and market prices on the black market. ̈ Stage 2: The immediate post-socialist economy is characterized by the re­moval of ultimate political control over the economy but without the fundamental institutions of a market economy for the time being. In particular, there are as yet no institutions to ensure that the necessary hard budget constraints are imposed. Providing ample opportunities * Disclaimer: The opinions expressed in this paper are solely those of the author and do not represent the official views of unmik , the United Nations, or any other agency or organisation. ipg 2/2006 Wittkowsky, Transforming Kosovo 145