This study examines Kosovo’s attempts to create efficient political and economic institutions while assuming that if these institutions cannot perform well and the market economy will also fail. Thus, the main aim of this paper is to understand the reasons behind institutional and economic failure. A qualitative research approach that we used is based on a longitudinal perspective and a set of secondary data which are analyzed by using Qualitative Content Analysis technique. Our findings suggest that the state-building period which was administrated by the international organizations created problems such as polarizations in views, duality and imbalance in power distribution and illegitimacy of the governing institutions. These problems are more or less reflected in other institutions in the following independence period. Moreover, due to continuing and deepening political fragmentation and tension amongst the local parties, attempts to create well-functioning and supporting institutions have not yet produced fruitful results. With such institutional performance Kosovo has not yet been able to create a functioning market economy and to overcome economic challenges.