The a noteworthy change in the course of the

The economic growth of Albania



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Albania has encountered a noteworthy
change in the course of the last quarter century, rising up out of an
especially segregated type of socialism in the mid 1990s to confront the
significant difficulties of framing a responsive, democratic system of
government and building up a modern economy.

While the progress was quite dramatic,
the transformation, from multiple points of view, is as yet a continuous and
ongoing process. Today, Albanians are anxious to proceed down the way of
accession to the European Union and to see the sort of economic development
that will one day enable them to appreciate similar levels of financial revenue
and opportunity that are found in developed Europe.


Albania’s economic system has passed
through roughly three periods following the preliminary transition: (1) a
turbulent period from 1990-1997 with general negative growth, culminating the
crumble of pyramid schemes and near civil war; (2) fast but basically
unsustainable growth over the following decade up to the worldwide monetary
crisis, driven by means of remittances, in large part resource-based foreign
investment, and construction; and (three) a lower growth trajectory from 2008
to the present, in which Albania has averted recession but struggled to discover
new drivers of growth. The aim of this paper is to give a diagnostic overview, attempting
to discover the binding constraint to sustainably higher economic growth in
Albania, as well as the potential drivers of economic growth. Specifically,
whether foreign direct investment, and the tourism sector could provide a
sustainable approach towards the economic growth of the country.


But where will this capital inflow come
from?  The major European economies,
including the robust German economic locomotive of the European Union and a
troubled United Kingdom are long since displaying stagnant signals of economic
growth, hovering over the 1% figure, occasionally even less. Same goes for the
United States, which has especially during the last year diminished, if not
withdrawn most if its financial aid given to cuts in the budget.


One question naturally arises: Would or
could China, take on the beloved role of the wealthy uncle from abroad, and
“adopt” young Albania to fill the gaps of troubled mother European Union, and negligent
father United States?


An introduction to the economy of Albania


For the reader of this work who has had
no prior information on Albania, I believe it is important to have a general
snapshot of Albania’s economic history from the collapse of the communist
regime to this day.


Prior to 1990, Albania was a really
isolated country with a centrally planned communist economic system for more
than 4 decades. Following the crumble of communism, Albania entered a period of
unstable economic transition, which culminated in the rise and crumble of
numerous huge financial pyramid schemes in 1996-1997, followed by a six- month
duration of conflict and the overthrow of the sitting authorities. Albania
finally returned to its pre-transition degree of income per capita around 2000
when convergence with advanced nations commenced. From 2000 to 2015, Albania’s
GDP per capita more or less doubled. However as of 2015 it nonetheless
represented only 9.3% of the organization for economic Co-operation and
development (OECD) level. The dynamics of growth differed significantly among
the duration before the global financial crisis, when growth was fast and
convergence was constant, and the period since, when growth was sluggish and
convergence stalled.


Figure 1: Albania’s GDP per
capita from 1980-2014 and convergence

Note: Where marked with an
“x” on the figure, Albania’s GDP per capita is shown as a share of OECD (group
as of 1980) average GDP per capita.?Source: World Development Indicators


Economic growth prior to 2008


Albania experienced the most rapid
economic growth in Europe in the decade prior to 2008, with real per capita GDP
growth averaging over 6 percent per annum. Furthermore, this growth became in
large part pro-poor, as consumption tended to grow faster for the bottom 40% of
families than the top 60% and the countrywide poverty rate fell from 25.4% in
2002 to 12.5% in 2008. Remittances played a main role in the growth process,
with personal remittance inflows averaging 15.2 percentage of GDP among 2000
and 2008.

Even though not the only component at
play, remittance flows helped assist strong growth in domestic demand for
construction and services.

Growth in domestic demand, collectively
with emigration of many working-age Albanians, drove increases in wages and
investment. a few new economic activities emerged during this period. Albania
diversified into finance, insurance, and professional services, inclusive of
call centers, during the 2000s. earlier, in the 1990s, Italian foreign direct
investment (FDI) had already helped to establish the Fason sector (textiles and
footwear) in Albania.


Economic growth after 2008


A slowdown in growth couldn’t be
prevented after 2008 given Albania’s near trade and investment ties to Italy
and Greece, countries that entered deep recessions. patterns of Albanian
migration additionally intended that remittance inflows depended densely on the
economic health of these  countries. What
had come to be generally construction-led growth in Albania collapsed after
2008. There were additionally numerous structural elements at play. Albania’s
fason sector confronted growing price competition and risk of factory
relocation to less expensive countries. two sectors that had been anticipated
to play a lot larger role in growing productivity, tourism and agriculture, did
not enjoy a leap forward. Regardless of all this, Albania maintained positive
growth rates during the course of the Euro-crisis and subsequent growth was
much less unstable than other Western Balkan countries (Bosnia and Herzegovina,
Macedonia, Montenegro, and Serbia). Kosovo was the only other Western Balkan
country to keep away from recession in the course of this period. in comparison
to other countries, Albania experienced a smoother transition to lower annual
growth after 2008, starting to recover only gradually after 2013.



Since 2013, which coincides with the
Socialist party taking over the government


Economic indicators for the period
2013-2017 display that Albania has not transitioned to a brand new high growth
trajectory, however there’s some indication that a gradual transition to a more
sustainable growth model is underway. Real GDP growth for 2016 has been 3.5%
and early predictions display it has grown above in 2017. Albania has seen
slight yet steady growth throughout sectors and a steadily falling rate of
unemployment since mid-2014. While the level of growth since 2013 should be
seen as an accomplishment for the duration of a length where Albania both undertook
an IMF adjustment program and noticed the price of oil exports crumble, it
remains insufficient to assist a rapid convergence with high-income countries.


Figure 2: Albania’s GDP
growth compared to Greece and Italy and the Western Balkans



Source: World Development



Binding Constraints to Growth


The growth issue for Albania on the verge
of 2018 I believe should be the quest into finding out what are the limitations
that tie down Albania from converging more quickly with developed countries in terms
of income per capita?

Since the high growth period up to 2008
was in large part driven by means of an essentially unsustainable construction
boom as well as a growing reliance on remittances, it’s far important to
observe that the above-mentioned quest into the discovery of the related factors
of limitations towards growth, should not consider the drivers present
throughout the high growth period and absent now. Instead, this growth
diagnostic should attempt to discover the binding constraint to sustainably
higher economic growth in Albania, as well as assess Albania’s potential
comparative advantages.


Lessons drawn from my first semester in


According to Dr. Fu Jun, who has been
kindly giving us during out first semester a brand new box of tools to open up
any black box of growth, in order to design public policy, we should be mindful
of the microeconomic perspective, and for a country to grow, we need the right
environment for that to happen. We need to furthermore understand which is the
micro-foundation in order to create incentive for the people to be able to
create growth as a function of resources, people and technology. We need to
have first a puzzle, and than come up with a hypothesis. According to his
metaheuristic growth equations, growth is initially a function of natural
capital, human capital and physical capital.


In spite of critical problems in lots of
other areas, the essential input that is ubiquitously lacking in Albania’s
non-public sector is knowhow. By “knowhow,” it’s implied the knowledge and
skills needed to produce complex goods and services. This sort of knowhow isn’t
something commonly discovered in a single individual, but rather something that
is shared throughout individuals in firms and industries. Knowhow consists of product-specific
knowledge, like the engineering capacity to fabricate a specific item, but also
a various set of knowledge and skills that firms need in order to supply a
product or a service. This includes managerial knowhow, understanding value
chains of manufacturing, ability to access distribution networks and foreign
markets, the capability to develop financially sound business plans, and
capability to gain finance, amongst others.


Albania faces a unique knowhow constraint
that is deeply rooted in its closed-off past. After the fall of communism, the
private sector grew out of what people knew how to do in areas such as
agriculture, herbs and spices, and metals and the scope of what the private
sector knows how to produce has expanded very gradually only over time. Some
things that Albania produced while closed off had been quickly found to be
uncompetitive (like agricultural equipment) whilst faced with competition from
other countries. Other things had to be discovered and straight away compete
with other countries where these industries were properly established, placing
Albania at a substantial disadvantage. Huge brain drain of the intellectual
class in the 1990s exacerbated the problem. When one looks throughout the
private sector in Albania, one can see the discovery of new comparative
advantages taking place very slowly, frequently as a consequence of the movement
of people, including returning members of the diaspora, and the movement of
companies through FDI. In a few cases, the transfer of productive knowhow can
be traced back to donor assistance.


If we take a look at the third and forth
equation of growth, where the variables include private returns versus social
returns (incentive), and considering in particular the second equation, which
defines growth as a function of rule of law, market and society, we could
assess that mirroring Albania’s challenge of restricted knowhow within the
private sector is a public sector knowhow challenge.

The capability of the state to provide
the public goods and services on which the private sector relies upon, and to
accomplish that under a brand new democratic system, additionally needed to be
constructed from the ground up after 1990. Constructing these state
capabilities has been a very sluggish and non-linear process. Nowadays,
Albania’s vulnerable state capability to ensure rule of law throughout several
dimensions can also be regarded as a binding constraint in a certain sense. In
order to shift to a greater rapid growth path, Albania will require the influx
of new ideas and more diversified knowhow, particularly via new sources of FDI
and leveraging the Albanian diaspora. However both firms and people outside of
the country are very sensitive to the form of threat presented through weak
rule of law institutions in Albania.


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