PRISTINA (Reuters) - Since a 1999 NATO air war that freed Kosovo from Serbian repression and put it on the road to eventual statehood, the Balkan state has absorbed 4 billion euros in aid, but made scant economic progress of its own.
Dogged by corruption, weak rule of law and an estimated 48 unemployment rate, Kosovo's shambolic economy has replaced independence from Serbia -- achieved in 2008 -- as the main issue as it heads for a snap parliamentary election on Sunday.
The economic and legal twilight zone that now defines Kosovo poses the biggest barrier to its hopes of progress toward joining the affluent, stable, democratic European Union.
"The economy of Kosovo is about to collapse," said Musa Limani, an economy professor at the University for Business and Technology in Pristina. "No politicians have worked for the interests of Kosovo. They were eager to get richer and some people got rich overnight."
Campaigning politicians -- from four parties whose platforms are virtually identical -- have promised to raise wages by 20, 30, 50 or even 100 percent, build highways and negotiate visa-free travel to the EU and the United States.
However the leading politicians are not economic experts, with most rising to prominence solely because of their role in the 1990s guerrilla war for independence. They offer few practical specifics on how to improve the economy.
With half of its people under 24, Kosovo has the youngest population in Europe, a demographic trend Pristina highlights in an international media campaign aimed at investors.
The glossy ads printed in places such as The Economist show attractive young people. But the reality is far from pretty.
Kosovo produces little apart from some base metals and food products but exporting them is difficult because Serbia has stopped taking in Kosovo goods and barred their transit on its roads to other countries since 2008.
The landlocked country's exports now cover only 10 percent of imports. The government remains the biggest employer and public investments and spending drive GDP growth.
The World Bank estimates unemployment is as high as 48 percent. When Kosovo advertised 120 prison guard positions a few weeks ago, more than 5,000 people applied. The pay of 300 euros a month was about average for one of Europe's poorest regions.
"Overall, in spite of positive growth, the economy is not creating enough jobs to absorb the young new entrants and reduce pressure on the labor market. Unemployment remains very high," the European Commission said in its annual progress report.
About 200,000 youth are expected to enter Kosovo's job market in the next five years. With jobs so scarce, Kosovars now constitute the fifth-largest group of asylum seekers in the European Union, a high figure given the small total population of two million in the majority ethnic Albanian country.
Some Kosovars pay smugglers 2,000-3,000 euros in hopes of reaching EU countries illegally and starting a better life.
Analysts warn of trouble in a still unstable region, where relations between majority Albanians and minority Serbs sealed off in a self-ruling pocket of Kosovo remain tense, if economic prospects do not improve for the young.
"Poverty and social problems are increasing every day because there is no economic development," said Limani. "One day people will explode and there will be no local or international security force that could stop them."
The 4 billion euros in aid since 1999 went mainly into rebuilding homes, roads, schools, and power plants shattered during the 1998-99 war. But the electricity grid remains old, unable to pump out energy needed for a modern infrastructure.
To date, foreign investors have seen put off by widespread graft, weak governance, unfair competition, frequent power cuts and a significant degree of black marketeering in the economy.
A glimmer of hope lies in the creation since 2008 of some 1,000 jobs in outsourcing enterprises such as call centers or computer engineering services for English or German-speaking companies. Clients include U.S. telecommunications company AT&T, Vodafone, BT and Orange.
One firm, 3CIS, has 150 employees, up from five in 2008.
"We have to show that the real potential comes from the youth and we need a better education system to be competitive in this global market," said company manager Gezim Pula.
Freek Janmaat, an economic policy adviser for the European Commission, sees better opportunities after the country builds a planned 700 million euro highway connecting it with Albania, privatizes its telecoms and builds a new coal-fired power plant.
"Kosovo needs to have some economic activities in production or services, otherwise it will be very difficult to sustain public expenses," Janmaat said.
Editing by Benet Koleka, Adam Tanner and Mark Heinrich