Economic growth in Albania: Influencing Factors yesterday, today and tomorrow

Electronic copy available at: http://ssrn.com/abstract=2361862

Law. Fiscal. Transparency

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AL-Tax Center

Working Papers,

Nr. 2013/12/19

www.al-tax.org [email protected] Date 01.12.2013 Tirana, Albania

Economic growth in Albania: Influencing Factors yesterday, today and tomorrow

Prepared and distributed: Eduart GJOKUTAJ

Abstract

According to the annual report of the Bank of Albania, for the years 1980 to 1990, the average economic

growth was at 0.9%. The largest economic downturn it is in the year 1990 at a level of -10%. The largest

economic growth it is in the year 1989 at a level of 9.8%. For the years 1991 to 2000, the average

economic growth was at 1.3%. The largest economic downturn it is in the year 1991 at a level of -28%. The

largest economic growth it is in the year 1999 at a level of 13.5%.

For the years 2001 to 2011, the average economic growth was at 5.3%. The slowed economic growth it is

in the year 2011 at a level of 3.1%. The largest economic growth it is in the year 2001 at a level of 7.9%.

Economic growth of past three decades of the Albanian economy is growing at an average 2.5%.

Based on the data of the last thirty years (one third of the life of the Albanian state) economy in this paper

will be presented in reference to significant economic and political factors that affect economic

development.

Keywords: economy of Albania, economic growth, factor of economic growth, development factors,

limiting factors,

JEL Classification: E20, E25, F41, F43

Electronic copy available at: http://ssrn.com/abstract=2361862


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Introduction

The history of the Albanian economy tells us that we were not aware clearly about the

influencing factors (development and limits) to long-term economic growth. In some

historical periods is confused current economic situation with the economic perception

for the future.

According to statistics from IMF, the annual economic growth has signs of different

levels among different countries. While developed countries have an economic growth

at low levels, the developing countries have a high level of growth. But this fact does not

mean that the high level of growth is better than low level, because countries have

different economic history and development rates.

It is fact that for the period 2002-2012, the global economic growth (see Indexmundi) it

is slowed down to an increase rate approximately 3.2%. While the average economic

growth of Albania during the same period is with an increase at 4.5%. In the first half of

the period there was an increase in the average trend 5.8%. In the second half of the

period, the growth is slowed (especially after 2008) with an average growth trend at

3.2%. But there are not the same reasons as those of economically developed countries.

For the same period the Balkans have had an average economic growth at a level of

2.9%. The first half of the decade there was an increase at 3%, while the second half had

an average economic growth at 2.8%. Analysis of the causes of these levels deserves a

detailed comparison of investment, population growth, human capital development,

public finance and economic history of each of the Balkan countries.


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1. How the economy has moved into Albania and what has influenced its development?

According to the annual report of the Bank of Albania, for the years 1980 to 1990, the

average economic growth was at 0.9%. The largest economic downturn it is in the year

1990 at a level of -10%. The largest economic growth it is in the year 1989 at a level of

9.8%.

For the years 1991 to 2000, the average economic growth was at 1.3%. The largest

economic downturn it is in the year 1991 at a level of -28%. The largest economic

growth it is in the year 1999 at a level of 13.5%.

For the years 2001 to 2011, the average economic growth was at 5.3%. The slowed

economic growth it is in the year 2011 at a level of 3.1%. The largest economic growth it

is in the year 2001 at a level of 7.9%.

Economic growth of past three decades of the Albanian economy is growing at an

average 2.5%.

But, has been there the economy a need for a higher economic growth than that?

Based on the data of the last thirty years (one third of the life of the Albanian state)

economy in this paper will be presented in reference to significant economic and

political factors that affect economic development.

These factors are not object of bias, because of the political system, as no change,

except could show a decrease of their influence. But, on the other hand they should not

be confused with the factors that impede economic development.


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4 development factors (social, economic and political)

1. Mining natural resources and energy resources, as well as a developed system of agriculture

and livestock are the elements that are included in this very important factor for the country.

Natural resources combined with the geographic location and other development factors give

the economy the proper breathing to be developed low cost.

2. Investment in development of assets (infrastructure, emerging industries) is a long-term

factor for developing, to reduce the cost of economic activities. Attached to the industry

development should never stop the factor of technological development, oriented from

government programs. It is the accumulation and capital formation that increases industrial

productivity, coupled with the workforce with high skills in terms of its use. The largest role

remains to foreign investors, but without underestimating domestic investors, who should see

the opening of the economy.

3. The increase of the quantity and quality (value) of labor (human capital) and specifically the

part that invest in increasing capacity and improving its quality is a significant factor with a

direct impact on economic growth. Of course, the risk of lack from the intervention of

government can create problems with the decrease of level of employment.

4. A democratic political environment with a modern institutional framework should be

considered as a factor contributing directly through the principle of good governance, which

interferes in the regulation of the economy under the laws and rules. Every institution of

government has its role in the economy, according to the functions for which is created.

Macroeconomic stability reduces the risk of investment and in this context should be considered

as a necessary condition in favor of economic growth.


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3 limiting factors (political, economic and social)

1. The political instability and uncertain institutions and inflexible in implementing legal system

(physical and intellectual property, financial system, taxes), widespread political corruption,

poor macroeconomic management, limited economic freedom and limited opening of markets.

Reduction of customs tariffs (trade barriers) are a prerequisite in favor of economic growth,

through their effect on the function of expanding of markets and increase of penetration of

products between countries (especially cross-border ones).

2. Low level of workforce skills, lack of knowledge to the modern technology, lack of political

culture, cultural and social, limited labor market

3. Old technology and low investments for its develop, orientation of economy that excludes

technology (trade, tourism), investments that doesn't favor long-term development, and poor

infrastructure

Analyze applies to all limiting factors as below, which have been since the early 90s and

still continue to be so, the three together over the last two decades.

2. Based on the combined analysis and the comparative data on the performance of the

economy, and the level of influence of factors in the economy of the past thirty years

(1980 -2011), if it can be divided into three parts shows that for the first decade there

has been a limiting use of the first factor and fourth.

Dominant part of economic development during the first period (1980-1990) consisted

of exploitation and processing of mineral natural resources, mainly for export to the

extent of 20% of GDP, and the development of agriculture’s for domestic consumption

and export to the extent of 55% of GDP. Even government through institutions

exercised a strong authority and political stability for economic and social development.

Obviously, the impact of only these factors can't give effect to economic growth, which

fell on average by 4 percentage points compared with the average of the previous


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decade economic development. Lack of freedom of de facto property according to the

model of the self-administration for the rural areas was the end of a model that was not

to increase the economy, but the opposite. The year 1989 is different (9.8% increase),

because being the year that followed the debate a year ago to change the political

regime through change of the economy. This historic change was preceded by some

initial ways of liberation from the yoke of socialist economy itself. A complete and

comprehensive analysis of the factors did not take place even though there are specific

analyses of professors of economics.

The second half of the period (1991-2000) is dominated by a use of all the factors, but

not coordinated in time and space with each other. Lack of capital continued to be the

cause of poverty in the country. This is the period, when natural mineral resources were

not part of the new technology investment, in agriculture was not followed by

investment for as long as to replace its leadership role in the economy. Freedom of the

property was declared, but began to turn into a freedom that 'kills'. Private property

does not become sacred to the economy. In this way, was not achieved the

encouragement of the individuals and investors to begin to invest money to maximize

their profit in the new economy and to give breathe for long-term perspectives of

economy based on property development. But, quite wrong economic direction of

political and economic leadership of the time was clearly reflected in allowing the

pyramid scheme. All this showed immaturity of leadership to lead the country towards

economic development.

But are learned the lessons by the leadership or anybody of them felt the responsibility?

Can be feel all quiet now?

Investments in the industry that somehow will have shaped the economy were sporadic

and oriented to the politics of the moment, without the proper vision that requires the

open economy. Attached with the economic and social situation was the lack of a

growth orientation of human resources for training towards a specific industry,


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excluding initiatives with little weight on the economy through processing of imported

raw materials for exporting to European markets (façon contract).

For the third period (the last decade) has been growing interest in natural resources, but

increase of political patronage versus the resources of the economy, for own private

interest in leadership, today old, did not create any opportunities for the organization

and strengthening of investment in extractive industry and agro-industry. Although, the

factors have been involved in a discrete mode, where the EU statistics, and of the

Albanian institutions show for Foreign Direct Investment funds that reached up to the

level of 9% of GDP, the economy does not got the proper quantity of 'energy' in order to

have a sustainable economic development, based on the coordination of the four

factors. So, if it were otherwise, then the economy will had a continuing growth trend.

But, in fact the decline of growth happened for at least the last four years. The largest

increase was in 2008 (7.5% increase) and immediately in following year the growth was

slowed down and was less than half (3.3% increase), without changing of external

factors, or internal. The economy did not had an immediate effect from the non

coordination of the factors. In segments of industry and government the ideas were

misused in favor of the private interests of fictitious economic elite.

3. Clinton once said that technology is the engine of economic development.

With the rapid introduction of technology in the economy it facilitates the creation of

new jobs, builds (reconstruction) industrial sectors to maintain the appropriate columns

for long-term economic development. But, it also helps the country's governance

through technology harmonization with the objectives of environmental protection and

enhances the interest for foreign investors and for the visitors. Once are chosen the

industries that will be promoted for long-term economic development, then will be

oriented the increase of skills and qualities of the workforce through the education

system in the country, in order to penetrate into regional markets of labor and

technology.


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Although the analysis should not be considered as complete within this format, I think

that today's economy, as mentioned in the reports of the IMF, on budget policy, and the

recommendations of the World Bank office that are on the same page with the idea of

coordination of development economic policy, which is structured according to the

factors mentioned above. Never should forget, the economic structure and its political

transformation after the regime collapse. Albanian economy is dominated today 70% of

the trade and service sector. On the other hand, it should be noted that capital

accumulation as a consequence of economic development, was concentrated in the

hands of few individuals, linked with stories of corruption. The accumulation of capital,

around a few people and businesses is a major reason for the apparent slowdown of

growth in recent years.

It is this structuring, which should begin to shape today's economic model. This year

should serve as a prelude to the start of the project to long-term sustainable economic

development (economic policy) of Albania of tomorrow, based on the model that passes

through the four points above, as a theorem that is implemented from all states

already, seeking development through the model.

How will know us if the government will carry out its duties and will be a factor of

economic growth developer?

The answer can be found in monitoring the quality of governance (World Bank) that

could be measured through accountability, political stability, absence of state violence,

effectiveness of governance, institutional framework, implementation of laws at full

capacity, and control of corruption.

Economy & Finance

Economic growth in Albania: Influencing Factors yesterday, today and tomorrow