Albania's Economy in Transition and Turmoil 1990-97

Anthony Clunies-Ross, Petar Sudar, Anthony Clunies-Ross, Petar Sudar

• Publisher: Taylor & Francis
• Year: 2019
• eBook ISBN: 9780429860751
• Edition: 1
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

First published in 1998, the contents of this book is the result of a series of studies by several Albanian scholars, in cooperation with contributors of differing nationalities, on various aspects of the Albanian economy during its 'transition to market'. This study's multiple aim is to provide an accessible body of information for outsiders interested in Albania; to provide locally based teaching material for Albanian economics students; and to also clarify policy issues.

1 Introduction: Puzzle and Paradox

Albania was a maverick in Cold War Europe, and it has continued to be a maverick among the ‘transition economies’. But the paradoxes begin here. Ending the 1980s as the poorest country of Communist Europe, the most isolated and autarkic, and the most extreme in its Stalinism, and then (at least among countries outwith the former Soviet Union) suffering the most severe disruption to production in the first couple of years of its transformation, it appeared by late 1996 to have become the most successful economically over the previous few years. It had been especially quick to achieve a stable floating exchange-rate and fairly stable domestic prices. It seemed set to overtake its 1989 level of production earlier than any of the other European and ex-Soviet transition economies apart from Poland and perhaps Slovakia and Slovenia; and, alone among them, it had apparently experienced growth at ‘East Asian’ rates for four years. Advocates of shock-treatment as the best recipe for transition to the market could plausibly cite Albania in support.

But then, with the collapse of a booming informal financial sector in the early days of 1997, all went into reverse. Much of the productive capacity and many social facilities were physically destroyed, as much of the country fell, more or less briefly, into anarchy. Understandably, in view of these experiences, informed Albanians have varied in their outlook at the start of 1998 from high optimism to extreme gloom.

The immediate causes of the collapse of 1997 are clear enough. The deeper causes—why a financial system of that especially precarious character grew so fast; why there was no official response to the danger- signals; why the multilaterals and foreign aid-givers were not able to make warnings heard; why people reacted so destructively to the collapse; why state control broke down—must remain subjects of puzzle and debate. The lessons are not nearly as clear as we should like them to be.

Equally the success of the years 1993 to 1996 raises puzzles of its own. If the key to success was the early shock-treatment applied, the question arises why politically such radical policies could be followed in Albania rather than elsewhere. We believe that there are plausible answers here that remove some part of the mystery.

Transition Economies

This book tries to see and evaluate Albania’s experience in the 1990s against that of the other transition economies. We need to explain how exactly we are using the term.

No one had heard of the transition economies before 1990. They were the product of the extraordinary events of the last two months of 1989. At first the term referred to the Soviet Union and those eight countries within Europe that were, or had once been, members of its alliance. Transition meant the move from a largely-command to a market economy.

China was not normally included because the timing of its (spectacular and economicallly successful) transformation was so different. The process started in China about 1978, but gradually and without an explicit goal, and it encountered nothing much like the painful shocks that have characterized the transition economies of Europe. Vietnam, Laos and Cambodia are also not included. Vietnam, like China, has not so far given up the form of one-party rule. Mongolia, however, to that point a genuine Soviet satellite, which changed direction at about the same time as most of the rest, might naturally be classed with its European brothers.

From 1992 the number of transition countries had multiplied, with the fragmentation of the Soviet Union and Yugoslavia. East Germany had joined West Germany in October 1990, and Czechoslovakia had broken into two at the start of 1993. Since the Soviet Union divided into fifteen and Yugoslavia into six, this would give (without Mongolia) a total of twenty-eight. However, we shall follow for convenience the list used by the European Bank for Reconstruction and Development, and (ignoring Bosnia-Hercegovina, Serbia and Montenegro, as well as Mongolia) treat the transition economies for purposes of comparison as twenty-five. They are divided into the twelve within the CIS (the Republics of the former Soviet Union minus the three Baltic states) and the remaining (non-CIS) thirteen, which we shall call ‘Central European’. There is no particular logic about this list. Five of the CIS twelve are just as completely outside Europe as is Mongolia. Confining the comparisons to the twenty-five is a matter of convenience.

The Processes of Transition

Transition from state- and collectively-owned command-economy to market may be seen primarily as a matter of liberalization and privatization. But these processes require that new techniques for stabilization should be adopted, since the old necessarily tend to be abandoned with liberalization. So we can see stabilization under the new conditions as the third key process involved.

On the face of it liberalization is easy. It means simply removing restrictions. But, given the assumption that these are not all removed at once (as they seldom if ever are), the sequence in which this happens is of some importance. Getting the sequence wrong might mean not only introducing new distortions but also disturbing production and income, and destroying enterprises that had every reason for surviving. Liberalization from the extremes of a command economy paradoxically requires new forms of regulation and supervision.

Privatization raises difficult questions throughout. In what units will state or collective property be transferred, to whom, for what price and on what conditions? Should former private owners or current workers or occupants have any priority over the rest of the public in the acquisition of particular assets or enterprises or dwellings? Should relevant experience be a requirement for coming into possession of particular types of property? Should the rich have priority in obtaining privatized assets (as is almost inevitable if the assets are auctioned for cash)? In the absence of open auctions, can favouritism be avoided?

Stabilization in transition may also be a delicate matter. In the face of liberalization, there is typically a conflict between saving existing enterprises and jobs on the one hand and preventing the excessive issue of money on the other. So in the short term maintaining output and real income is likely to compete with price stability. Numerous groups will be battling to save their particular interests; and yet if all vocal forces are to be satisfied the rest of the public will suffer. There will be the consumer- burdens of inflation, which will also aggravate all the uncertainties of the situation to the detriment of useful investment and enterprise, and in addition spending on important public purposes will probably be neglected. The quest for price stability has to be pursued with some attempt to limit collateral damage, and against political pressures that have the potential for threatening the position of a government and even endangering civil order.

Apart from these esssentially transitional problems of stabilization, there are questions to be decided about a continuing stabilization regime—what disciplines over fiscal, monetary, exchange-rate and wage variables should be followed in order to combine price stability with steady income growth. Getting the best trade-off here requires judgments of how the particular economy behaves: whether real wages in the private sector, for example, adjust rapidly to clear labour markets or whether they have an institutional life of their own; whether accordingly relative prices tend to return to their previous alignment after some change in the nominal exchange-rate or in world prices.

A further need in transition to the market is for the development of new safety-nets to provide a rudimentary living for those displaced from work by the changes.

But the creation of a functioning market economy goes well beyond liberalization and privatization and the stabilization measures and safety- nets that must accompany them. There is also a need for what is broadly called institutional development: that is for systems of formal and informal rules, together with the organizations to develop, interpret and enforce them, and also what might be called habits of mind—perceptions of how the new environment works and of what reactions are appropriate within it.

What is needed is not merely commercial statutory law appropriate to such an economy (general law on business organizations, contracts and civil wrongs), but also courts and practitioners that can interpret the law, and agencies to police it. There must also be laws to impose taxation on private economic agents. Also needed with more or less urgency are laws and agencies to regulate the production or delivery of particular kinds of service where the consumer or user needs guarantees of safety, reliability, or quality; or where competition may be deliberately limited; or where (as in financial institutions and markets) apparently rational behaviour on the part of a number of individual participants may risk systemic collapse. These laws too need their interpreters and enforcers. In some cases the state (within a basically market-led economy) may need to set up, or deliberately to foster, certain types of essentially commercial institution, such as particular forms of financial intermediary.

More subtly, and not directly within the gift of the government, a market economy needs some understanding among members of the public of how such a system may be expected to work. It also needs certain norms of personal behaviour if it is to operate efficiently. A measure of trust and trustworthiness must exist and some readiness to respect the law. There needs to emerge a recognition of the distinction between legitimate and criminal ways of pursuing pecuniary self-interest.

The Dubious Success of Transition to Date

The record of economic growth or recovery so far across the transition countries taken together has not been especially encouraging. If policymakers in early 1990 could have seen the EBRD’s recent Table (1997a, p.7) estimating changes in GDP between 1989 and 1996 in the twenty-five that we are considering, they might well have hesitated. In only one of the twenty-five (Poland) was estimated GDP in 1996 higher than in 1989, and in only two others (Slovenia and Slovakia) was it 90% as high or more. In Albania it stood at 87%. In the twelve CIS countries GDP altogether in 1996 was at only 51% of its level in 1989, and in the remaining thirteen taken together it stood at 91%. If the outcome could have been foreseen, a strategy likely to see GDP reduced by a half, or even by 9%, over six or seven years could hardly have seemed an attractive one.

Let us admit that GDP comparisons of periods between which a country’s price-system has radically altered must have an arbitrary element; and also that GDP in and after transition may be under-stated in relation to GDP before, both because the unrecorded economy will probably have expanded and because what is produced conforms more closely to what people want. Yet the gap for the CIS economies (except Uzbekistan) and for some others is so huge that these reservations are not much consolation. For the peoples of many of the transition countries, living standards have become not only less secure and more unequal, but also far lower on average.

While it would no doubt be difficult to reconstruct what advisers, from Western countries and the international organizations, typically expected at the start of the decade, it now seems likely that they often over-rated the speed of adjustment to changing incentives and the degree of reform that could be accomplished by simple processes of transferring property rights and removing restrictions, and that they often underestimated the institution-building that would be necessary and how difficult it would be.

Albania and its Record in Transition

We consider, in chapters 5 to 9 below, the Albanian experience of liberalization, privatization, stabilization, safety-nets, and, as far as we are able, institutional development. Particular faults may arguably be picked with certain aspects of the first four processes. Privatization in 1996 was not yet complete, though quite advanced by the usual standards of transitional economies at the time. The wisdom of opening the economy so abruptly to world competition is at least debatable, though many would defend it vigorously. But on the whole, in the perspective of the mid-1990s, there appeared to be far more to commend than to criticize. In a number of respects (to adapt the English proverb) the proof of the pudding seemed very well attested by the eating. That things eventually (if briefly) went so badly wrong we have, by elimination, to attribute to a failure or failures in institutional development. This diagnosis possibly raises more questions than it answers. In particular, it does not tell us whether the failures were those that any government, with reasonable human foresight, could have remedied.

So, viewing the scene in 1998, we must try to explain both spectacular success and a spectacular setback. In the next chapter we shall consider a number of the features that have made Albania unique or at least distinctive, and we shall begin to speculate on how these might fit together in such a way as to resolve the paradoxes.

2 Albania’s Distinctiveness

Albania’s distinctiveness among the transition economies may be seen in its starting-point; in the policies adopted; and in the responses of the people taking part, as reflected by the economic outcomes. We shall outline these various elements and then tentatively suggest how they might fit together.

Starting Point

Barring the Caucasus, Albania still holds an undisputed place as the poorest country in Europe. It is also, by conventional GNP-per-capita measures, one of the poorest of all the twenty-five transition economies—surpassed in 1995, according to the World Bank (WDR 1997, pp. 214, 248), only by Tajikistan, Azerbaijan and Georgia (all of them recently theatres of war). Albania’s GNP per head cited for that year is US$670. There is no estimate on a purchasing-power-parity basis. Yet we guess that the hidden economy in the 1990s has borne an unusually large ratio to the recorded economy on which this estimate is based, so that true GNP per head (even translated conventionally by the exchange-rate) may be substantially greater. By the mid-1990s inward transfers, moreover, added an amount probably equal to about 20% of GNP to what is called national disposable income (what the population and government actually have to consume or save). So the very low GNP-per-head estimate is almost certainly misleading as a pointer to potential living standards. However, Albania is definitely classed as a low-income country.

Fitting with this ranking is Albania’s high proportion of workforce in agriculture. This is given by the World Bank for 1990 (WDR 1997, p. 220) as 55%, much higher than in any other of the transition economies in that year and comparable to Pakistan or Indonesia. Inferences from figures provided internally would put it slightly lower, at 50.5% (36.7% in collectives and 13.8% in state farms). Official estimates of the share of the net value of output coming from agriculture in 1990 put it at 39%. This proportion of GDP from agriculture even in 1990 would match with some of the poorest countries if measurements used are comparable. The World Bank’s estimate for 1995 (WDR 1997, p.236) makes the proportion of GDP originating in agriculture 56%, higher than for any of the 47 other low- income countries listed except Georgia and two of the very poorest countries in the world, Tanzania and Ethiopia.

But does the picture of Albania as a low-income country, like Malawi or Chad or India, really hold up? Certainly the health and education indicators do not fit very easily. Its life-expectancy at birth of 73 years (1994) is more typical of upper-middle-income countries; its infant- mortality (31 per 1,000 in 1994) suggests a middle-income country; and its primary-school and secondary-school enrolment rates would also not be out of place among upper-middle-income countries. Such divergence between rankings on official GNP per head and rankings on health and education indicators is not unusual: China and the State of Kerala in India have shown similarly high ratings in spite of apparently low average income. But Albania’s record in health and education has provided an important benefit to its people and a productive asset which talk of the country’s material poverty should not obscure.

In its command-economy period Albania enjoyed all the typical institutional features of Stalinism, if anything in an extreme and rigorous form: collective and state farms, with a very small part of arable land in private plots; state-owned industry; a ban on private trade and enterprise and on commercial investment from abroad; centrally-directed allocation of labour; state management of all external transactions; domination by the single Party of all spheres of social life. After the completion of the collectivization of land in 1967, if not before, the market mechanism must have been virtually unknown except in illicit transactions. There was no system of justice independent of the government; and civil courts had a very limited range. There was a fairly rigorous distinction between peasants and others; a person classified as a peasant needed a settlement licence to relocate in a town, and, unless there was some official reason for the move, this was extremely hard to get. Moving into or out of Albanian territory was banned, except in rare privileged cases (until inward tourism began to be allowed in the mid-1980s), and unauthorized att...

Table of contents

• Cover
• Title Page
• Copyright Page
• Table of Contents
• List of Tables
• List of Contributors
• Preface and Acknowledgments
• List of Abbreviations
• Note on Albanian Place Names
• Note on Albanian Pronunciation
• Map: Albania’s Districts and Neighbours
• 1 Introduction: Puzzle and Paradox
• 2 Albania’s Distinctiveness
• 3 Land, Regions and People
• 4 Politics, 1990-96
• 5 Liberalization
• 6 Privatization
• 7 Stabilization
• 8 Safety-Nets and Social Security
• 9 Institution-Building
• 10 Changes in Production and Trade Patterns
• 11 Public Finance
• 12 Labour and Employment
• 13 Financial Institutions
• 14 Foreign Resources
• 15 Events of 1997
• 16 Prospects and Priorities
• Bibliography
• Index