FACTBOX: Main challenges for Kosovo's nascent economy

(Reuters) - Kosovo declared independence from Serbia on Sunday, ending a long chapter in the bloody breakup of Yugoslavia. Here is a look at the main economic challenges facing the new state.

UNEMPLOYMENT

Some 50 percent of the workforce is in formal employment, with the rest either long-term unemployed or working unofficially. Some 30,000 young people enter the job market every year, five times the number Kosovo businesses can absorb. The government wants to ensure formalized access to the EU labor market by setting up labor-exchange programs in specific sectors.

POVERTY

Some 45 percent of the population subsists below the poverty line of 1.5 euros a day. Wages average around 220 euros ($320) a month, and most households receive remittances from at least one family member working abroad.

INFRASTRUCTURE

Kosovo's road and rail network was neglected in Yugoslav times, fell into a total state of disrepair during the 1990s, and was partly destroyed in the 1998-99 conflict. The repair of major arteries around the capital Pristina has been marred by low-quality planning and materials. The government plans international tenders for country-wide highway concessions.

Utilities, especially water and power, are generally unreliable although much improved since the previous decade. A major planned project, the Kosovo C thermal power plant, aims to draw on the territory's lignite deposits to turn Kosovo into a power exporter by 2015. A reliable water supply will require the political agreement of the Serb minority, which dominates the area around the main reservoir in north Kosovo.

EDUCATION

Serbia's decision to strip the province, with its 90 percent Albanian majority, of its autonomy in the late 1980s resulted in the creation of ad-hoc Albanian parallel systems of administration and education. The low quality of the informal schooling -- mostly in small groups, in private homes -- was exacerbated by the mushrooming of dubious private colleges after the U.N. took over in 1999, translating into poor skills even among university graduates. Foreign language learning is a bright spot, with the majority of young people being competent in one or two European languages due to the diaspora influence and the international presence.

CORRUPTION

A wartime legacy of racketeering combined with the Albanian tradition of strong family networks has created an opaque system of personal connections that permeates everything from simple administrative services to the allocation of tenders and scholarships. EU-standard laws were imported almost unchanged, but implementation is extremely patchy. Extensive media reports on graft and corruption in the U.N. mission failed to lead to prosecutions due to the immunity afforded to international officials, a fact adding to Albanian disenchantment with the system.

BUSINESS CLIMATE

The main drags on investor confidence and competitiveness are a weak legal system, high interest rates -- round 13 percent -- and the tax system, which frontloads start-up costs through customs duties on capital goods. Access to international financial institutions should help establish cheaper credit lines, and the government plans to shift the focus of tax collection to favor small and medium enterprise development.

OTHER ISSUES

The unilateral adoption of the euro as the successor to the German mark imposed financial discipline and secured a low inflation environment, but left fiscal policy as the main tool of economic policy. Budget stability is seen as crucial in 2008, as the government of the new state takes on responsibilities, and the associated costs, from its international overseers. The inheritance of part of Serbia's foreign debt -- with annual debt service seen at three percent of GDP -- will add more pressure.