How to Solve the Economic Crisis in Albania: Has the housing market “matured”?
The primary purpose of this paper is to deconstruct the economic myths present in the Albanian political economy discourse, as well as to publish new and alternative ideas on how to overcome the economic crises. Debating ideas, when done properly, is determinant for the civilization of any society, especially for the Albanians, who suffer from a chronic lack of alternative ideas.
The mediocre and disrespectful debate “ethic” that characterises debate culture in Albania kills idiosyncratic and aggregate intellectual conceptions and formulations. He who does not think like “everyone” is attacked until he conforms, thus stifling new ideas and solutions. Consequently, Albania is a myth-believing country and is far away from being an idea-forming one. It is also the cause of well-known Albanian complexes such as the impostor syndrome and an inferiority complex. And last, but most crucially, it is the cause of the appalling and tragic economic conditions in the country.
Ironically, the debate in Albania never remains the economy or political-economic solutions. Moreover, even when the debate is on the economy, the result is not inspiring but damaging. Crises in the economy are not being resolved quickly. How can this be achieved?
The socio-economic condition or situation in Albania, since 2011 to the present day, continues to be dramatic and tragic: there are no new quality or low-quality jobs; there is no lending, except from loan sharks; there are no increases in purchasing power of consumers. On the contrary, spending is at its lowest levels and there are no new significant investments. Therefore, there is no visual GDP growth. This situation is tragic for an underdeveloped economy with a young population at a time of peace and integration, therefore, with tremendous potential for “catch-up” growth.
Although the crises were originally caused by external shocks from the Italian and Greek financial and sovereign debt crises, they remain left unresolved internally by Albanian policymakers. The Socialist government, led by Prime Minister Edi Rama, is doing a good job at maintaining macroeconomic stability, but the dramatic economic condition necessitates a greater emphasis on stimulating the economy. Moreover, a more comprehensive approach is needed to fix the rising bad debt problem that is hurdling economic growth.
A 400 million US dollar loan granted by the International Monetary Fund is positive on the one hand since it could bring much needed liquidity to companies that built public infrastructure projects during the previous government, led by former Sali Berisha (2005-2013). It can be used to stimulate the construction sector and address the debt problem. Regarding the housing market, it could increase house-building, but it does nothing for house-buying.
On the other hand, the loan is negative because its conditions, such as tax increases and spending cuts, directly affect the real economy. The primary condition for the loan was the implementation of a progressive tax system for personal income starting in January 2014, just days after this fiscal package was passed by the Parliament. Until then, Albania had a competitive ten per cent flat tax system. Fiscal stabilisation through “shock therapy” rather than a gradual introduction has proved damaging to economic recovery and does not solve crises quickly. Albanians expect that ideas to solve their domestic crisis should come from outside; in this case, the IMF.
But what is the IMF, an international financial institution? Yes, a very important one. The IMF has played an important role in post-communist Albania, but history shows that, like any partnership, there have been both positive and negative results. Having said that, the atom of this institution, like in every organization is the individual who takes actions that sometimes are wrong. The IMF conditioned shock therapy fiscal stabilisation in Albania. Moreover, it failed to propose any significant policies to stimulate economic growth. To clarify, macro-economic stability is a necessity, but can be better achieved if the strategy is not austerity, but growth.
What is needed is a strategy that is ambitious yet concrete that should include both fiscal and monetary stimuli with the objective of restoring the pre-crises growth levels of six per cent of GDP, as soon as 2015.
Like the entire economy, the dynamism of the housing market has ceased, or rather collapsed, and survives predominantly through barter deals. It is in a “zombie” state: there are no exchanges of money, lek (the Albanian currency), euros, dollars, pounds; and everyone is waiting anxiously, because they all have obligations. The value of property in Albania, except in some central concentrated areas, has fallen over the last few years, affecting all major towns and villages. Consequently, the housing market in Albania is not suffering from price inflation, but rather price deflation. Deflation, if we use the provincial intuition, shows that there is no demand for new housing, implying a “mature” housing market with a “saturated” demand.
This is one of the most absurd economic myths circulating the economic discourse and it goes as follows: there are many buildings with unsold apartments, because there is no demand for new homes. Since every family has one by now, it is normal that the housing market has lost its place as the biggest contributor to economic growth and it is not the responsibility of the government nor the Central Bank to stimulate this market by helping demand for new homes.
How can one conceive that the housing market has “matured”, and has therefore already completed its developmental role in a developing economy that is still in transition? What does “mature” mean in this context? Why is it that in developed economies such as England, this market continues to contribute to economic growth, even though the English have been building and selling houses for hundreds of years?
This myth is the result of ignorance and illogical reasoning. This myth, and myths in general, are created by plagiarising the economic discourse in developed countries, and by the inability of the responsible individuals such as policy-makers, to master these ideas and to modify them according to the domestic needs.
Today in England, there are schemes to promote home buying for young couples, called “Help to Buy.” Why not create such a scheme in Albania? Contrary to what is commonly thought, it is not this scheme that is causing the new housing “bubble”, but the fact that international demand for property in London has increased considerably during the Great Recession, because it is perceived as a safe investment. To clarify, some even in idea-forming countries believe these economic myths, but the difference is that they do not determine the country’s political economy policies.
In Albania, the demand for housing exists and can be seen in the aspirations or dreams of young couples wanting to move out of the family home. Logically, the price deflation in the Albanian housing market does not show that there is no demand for new houses or apartments. Instead, the deflation of prices, clearly demonstrates that it is impossible for young couples to fulfill this dream, which should be considered a human right since it has a powerful civilizing force.
Sad paradox and Idea-solution
Reviving the housing market is the primary need of the Albanian economy and could be considered an imperative to immediately retuning high growth levels of six per cent of GDP. This was the role of this market during the first decade of this century (2000-2010). Therefore, primary policy to revive the economy must be focused on its stimulation. A similar policy should have been undertaken by the previous government in 2011 and hopefully it will be implemented by the socialist government now in power. Although, it is positive that the government will stimulate the apparel industry as it strengthens exports and supports low-skilled employment, this industry does not have a transforming and value-adding effect, like the housing market can create, and does not affect the whole economy and its agents.
A logical solution to stimulate or assist this market, so that the economy revives quickly, is the creation of credit schemes for young couples that buy their first home, even if only one partner works full time. It is shameful to say that there is no demand for mortgages, especially when the vast majority of young people still live with their parents. Even during the Communist or Hoxhist regime in Albania, the dream was a new family, a new home.
Contrastingly, in the present quasi-liberal regime, this dream is hardly even considered anymore. This is a sad paradox which highlights the fact that Albania has yet to build a banking and financial system that finances economic development and welfare improvements. Another scheme, that has value for the housing market is the Albanian coast. This scheme would also significantly improve the attractiveness of properties on the coast within foreign buyers and tourists. A portion of the default risk should be borne by the government and the central bank and another part should be borne by commercial banks and construction companies involved in these schemes.
Albanians, not all but most, are conscious and responsible individuals who pay their obligations and deserve a better life. The importance of these demand-stimulating schemes is critical since once this market is reignited it will revitalise economic development and simultaneously help resolve the crisis more swiftly. The builder and the worker win, the local and the central government win, the buyers who improve their living conditions win, the commercial banks win, the raw materials and construction industry win, the manufacturing industry wins, etc., and to abstract, wins tourism and urbanization, optimism, finance, logic, and most crucially, wins the idea.
Money vs. ideas
Prior to the implementation of these schemes, it is necessary to review the relationship that monetary and fiscal policy should have in the “zombie” economy. There needs to be a constructive debate to create alternative economic policies (monetary and fiscal) because the current policies –taught or imposed by institutions such as the IMF – have failed to achieve the primary objective of post-communist transition. To highlight this point, the most obvious example is the Albanian central bank.
It was the IMF that advised, conditioned and imposed in 1998, as the economy experienced the most spectacular financial fiasco in history, the minimalist and conservative role or mandate for the “Lek Temple” (Lek is the Albanian currency). The current mandate of the central bank, that low inflation is the only target of monetary policy, is utterly absurd in a situation of economic crises and when inflation is not a problem. The inability of the bank to understand what is really happening in the economy is clearly shown by the fact that it has not taken the deflation problem seriously. It is not only the housing market that is experiencing deflation pressures, but also all markets in the economy since the purchasing power of the Albanian consumer has collapsed.
Here arises a question: since there is deflation instead of inflation, is the minimalist mandate still legitimate and appropriate?
Also, it was the IMF who guaranteed the total independence of this institution, and whose budget is not dependent on the Ministry of Finance. Although, it is the paradise for wage earners in the country, it remains an incompetent institution. This is not a nihilistic thesis, some minimal measures have been taken, nonetheless, the “Lek Temple”, which is the main pillar of the Albanian economy, desperately needs a new interventionist yet responsible mandate.
This conjures an important truth and simultaneously dismisses another myth: money does not necessarily improve the quality of work, productivity and creativity. Money does not increase intellectual and professional competition once you have it. Competition develops only when anyone works to earn it and when meritocracy is the dominant culture. This is the only way to spread ideas and different experiences. This is the foundation of idea-forming countries. Ideas are determinant to the quality development of any country and its society – they are more important than money.
The alternative ideas aforementioned, such as stimulating the housing marketing via credit-easing schemes for young couples, directly addresses the key hurdle of the economic recovery. This could lead to a win-win scenario. This is a truth, and like every truth, which does not require the citation of statistics. Statistics are always relative and often empty, so I prefer not to cite them, but the six per cent growth of GDP has value, because it has a developmental and wellbeing connotations in the Albanian psyche.
This policy-idea cannot be conceptualised in myth-believing countries because it is born from the freedom of thought (critique) and the circulation of ideas. Now, isn’t it time for action?!
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.