“Abenomics” for Albania to Return to Six Per Cent GDP Growth

Photo: Emanuele (CC) commons.wikimedia.org

Abenomics

The year 2013 saw the Japanese economy turn the corner after two decades of stagnation due to what observes have called “Abenomics”, a series of aggressive measures based on the “three arrows”: monetary policy to end deflation; fiscal stimulus to boost government spending on infrastructure; and structural reforms to encourage private investment in the country. The first two “arrows” had a clear impact, whereas the third requires time and persistence. What Japan is witnessing now is a “wage surprise”: optimism and the rise of a national consensus, a shared sense that the government, major industries and organized labour should work together to increase wages.

The need to stimulate demand and credit supply provokes a debate that goes beyond economic technicalities to questions about the government’s overarching responsibilities. But the justification for such a policy must transcend economic logic if it is to win political support. A greater role for the government and central bank requires an overriding mission like an anti-crisis package. This is imperative for debt-financed stimulus and for the central bank to print money.

When Prime Minister Shinzo Abe came to power last year, he understood that an entrenched problem – only in Japan had the nominal wage level remained in negative territory for a staggering length of time – calls for a substantial, comprehensive plan for its solution. When he launched his growth-inflationary plan, many economists were predicting economic disasters. Instead, the liquidity injected has improved the market equilibrium even where the basic theories in modern economics call such approach incomprehension.

Abenomics is proving that Keynes was right, once again.

Yet, most importantly, Abenomics has been successful in a more fundamental sense, as PM Abe himself stated, “It has rebooted Japan’s collective psyche. The mindset of resignation has given way to one of the limitless possibility.”

Albania is not Japan, but like in Japan the solution is to set out high level, readable extrapolations of important policy.

The leftist government led by PM Edi Rama is waiting for a $400 million loan with low interest rate from the IMF. If it materialises it would be a positive achievement. But this fiscal stimulus, which includes the payment of debt inherited by the right and expenditure for good governance, may not suffice to tackle the economic crisis.

To return confidence and growth to our economy, the key problems to address are credit supply, aggregate demand and unemployment, in that order. This could be achieved via a coordinated “shock” fiscal and monetary stimulus with medium-term effects. The effect on growth will be direct and will improve attractiveness, which should better address dangerous imbalances such as the high public debt.

Albania: The entrenched problem

Almost half a decade has passed since the crisis showed its four main symptoms: first, very expensive credit and bad debt; second, a collapse of consumption demand; third, irrelevant GDP growth; and fourth, rising unemployment.

Moreover, Albania today remains the country with the lowest GDP per capita in Europe, with only 33 per cent of the EU28 average. Is not this a crisis in itself?

The economic outlook for growth in 2014 is low and uncertainty is very high. Actual consumption is also the lowest in the continent and is falling instead of rising. Consumer confidence, which is an accurate index for the whole economy, has never been lower. Bad debt has frightened the banks, which are not lending credit to people and businesses, making both vulnerable to loan sharks. Everyone desperately wants money.

The “Lek Temple”, our central bank, has not offered a clear plan or a corresponding monetary stimulus to solve the bad debt problem, consumption demand collapse and economic underperformance. The justification is apologetic: the mandate says the role of the bank is to keep inflation low (forever?). It has used low inflation to justify its inactivity in solving problems that have to do with the money it controls.

The problem is the lack of money and credit rather than their abundance. An increase in the amount of money is not going to chase a limited amount of goods; the problem is that fewer people are chasing them, creating deflationary pressures. Printing money directly stimulates consumption, production and job creation.

There are a few positive developments, such as institutional reforms and the $400 million debt-financed fiscal stimulus that the IMF has yet to agree. The base interest has been cut very slowly but remains high and there is scope for more radical reductions. However, it probably is not enough to kick-start our crisis-hit economy in the short-term nor put it on a sustainable growth path, if it is not followed by a larger monetary stimulus.

Moreover, the Albanian economic model is also in crisis since it is based on attracting foreign direct investment, which, because of the prolonged euro zone and the global crisis has “dried up”, so to speak.

Abenomics for Albania

It is imperative for the success of Abenomics in Albania to have a clear purpose, an outline of all the financial and monetary methods that will be employed and the projected results. A clear mission goal should be to return economic growth to six per cent (the average pre-crisis GDP growth) in two to three years. Together with the return of optimism should come economic revitalisation.

The short-term focus should be a large fiscal and monetary stimulus to prepare the ground and create optimism for structural reforms. The economy and its agents need to see quick improvements and have an optimistic view of the future, before going along with costly and lengthy structural reforms. This is because structural reforms are subject to a “time-inconsistency” problem. In turn, this creates a collective action problem that could increase pessimism.

The Albania Central Bank also urgently needs a new goal. A new mandate should replace the defunct conservative objective of inflation, with a more useful and developmental objective of growth and employment. There are many proposed methods that could improve the trade-off between inflation and production in monetary policy. Inflation should influence but not determine monetary policy. A minimalist and non-interventionist central bank like ours is a relic of the 1990s and the “last samurai” of the paradigm that monetary policy should be independent of politics.

Producing a coordinated fiscal and monetary “shock” stimulus to the economy will restore confidence in the economy and stimulate internal consumption and investment.

As a side effect, low interest rates and printing money will most likely weaken the lek in the medium-term which has direct implications due to the high level of “eurosation” in the economy. But, if managed properly, it will definitely improve the competitiveness of Albanian-made products, increase exports and produce growth in productivity and production. Furthermore, it will restore confidence in the economy, which will impact growth and create a more attractive credit market.

What is needed in the end is to transition to a “modernising” economic model led by foreign direct participation and not foreign direct investment based on attracting multinational corporations from Italy, Germany, Austria, Poland, Turkey and China. This will address unemployment and help speed-up the modernisation of our industry and work force.

The time is right for the new leftist government and the central bank to take on their responsibility to tackle the crisis head on. Together, they should return to six per cent GDP growth levels via a large and coordinated fiscal and monetary stimulus followed by structural reforms. This will restore confidence, improve Albania’s economic outlook in the short term and place it on a sustainable growth path. A modernising economic model should be adopted to grow industry and technology.

The hope is that if successful, after a while it will organically produce an Albanian “wage surprise”: a shared sense that the government, the central bank, companies and labour work together to increase wages, whilst enhancing productivity. Albania has tremendous potential for further growth with these policies; all that is required is reason and a daring attitude from the elite. We Albanians are a dynamic nation that will overcome the crisis and support economic modernisation.

This text also appeared in Albanian in the newspaper Respublica.

Epidamn Zeqo holds an MSc in European Political Economy from the London School of Economics and a dual MA in International Relations and Modern History from the University of St. Andrews. Mr. Zeqo has worked as a Research Analyst for Equiteq LLP and International Business and Diplomatic Exchange. A native of Albania, he lives and works in London.