Albania: The Dilemma of State Consolidation

Edi Rama, Photo: gov.ro

Problems versus promises

Albania’s communist legacies and harsh post-communist transition partially account for this. In 2012 in an opinion piece, I characterised the Albanian economy as being in a “zombie” state with GDP growth since 2011 being insignificant, one or two per cent (averaged six per cent in 2001-2010). Every market is experiencing minimal transactions and there are strong deflationary pressures while unemployment remains staunchly high with few new jobs. Credit is unattainable if you want it and unpayable if you have it. The “zombie” economy also continues to hemorrhage badly from every sector.

This dire condition for a small developing economy situated on the western outskirts of the Balkans, was caused initially by external shocks coming from the sovereign debt crises in Greece and Italy, Albania’s largest trading partners and financers. The prime minister at the time, Sali Berisha, founder of the Democratic Party (DP), led an unnatural coalition with Meta’s SMI. The “zombie” economy was left to die by the inaction of Berisha’s government, whereas now it seems to be reacting, for better or worse, to Rama’s hyper-action.

Rama’s government has a full majority in the parliament and has already passed sweeping reforms. First, the 10 per cent flat tax was replaced with a 15 per cent plus progressive one. Second, the new territorial reform decreased with immediate effect the number of municipalities from 11       0 to 61; and now, with similar speed, Rama is reforming the energy and water sectors also by raising utility bills by 10 per cent. International financial institutions such as the International Monetary Fund and the World Bank have conditioned these “shock” measures, but enjoy the government’s full support.

State versus economy

The starting point for discussion of the state is still the early definition provided by German theorist Max Weber who defines it in terms of “the legitimate use of physical force”. But the contemporary history of the state has a further critical component, namely its relationship to the community and states’ roles in promoting economic growth. Basically, development provides incentives for citizens to cede legitimacy. Growth also forms the basis for resource mobilisation (taxation), which can be translated into physical and social investments, ultimately reinforcing the legitimacy of the state.

Albania’s “zombie” economy remains Europe’s poorest with its lowest GDP per capita at around 28 per cent of the EU28 average. Isn’t this a crisis in itself? Moreover, around one-fourth of the economy is grey. Albania’s prime minister has said that his government will complete the formalisation of the economy in the next two years via any means, including long prison sentences for lawbreakers and demolishing private property. It is becoming clear that his priority is not to boost the economy but rather to boost the state. In two years, Rama’s policies have taken out of the “zombie” economy hundreds of million euros to shore up the state’s budget. What about decimated household budgets? The dichotomy between the state and the economy requires harmony, not a showdown in extremis.

Rama’s measures have been important in maintaining macroeconomic stability, but these policies have done little for the rebirth of the economy in the short and medium terms. While these measures are potentially beneficial in the long term, they are creating a toxic mix that could stop the economy entirely and cause a transitory recession. Economic stability is a necessity, but can be better achieved if the strategy is to first spur economic growth, and then to gradually implement structural reforms.

The fast pace of state consolidation, without substantial public investments and compensations, could undermine his legitimacy and that of the state. Collective rules are essential to guarantee sustainable development, but should their full implementation be undertaken so quickly in the context of the zombie economy? Is it justifiable for a new government to do close to nothing to increase aggregate demand or public investments? We are seeing what the misguided big bang approach has done to Greek society.

Change they should

The dilemma of state consolidation in Albania is whether to go about it quickly or gradually. This dilemma is not articulated by either policymakers or the opposition, and clearly does not influence policies. Although Rama’s vision is good, he is doing it too fast. In pervious articles I have argued that the key for a successful gradual approach would be to first boost the economy by any means, fiscal and monetary, to return six per cent growth. I have identified the housing market as the key to achieving this via credit easing schemes and I have called for a new interventionist mandate for the Central Bank of Albania.

This is because the symptoms of the crises, despite the tax hikes, point to deflation due to the collapsing purchasing power of consumers, high levels of bad debt, etc. Is deflation good for a developing economy? Rama has rightly identified a myriad of what he calls cancers in the country, and he is operating simultaneously on all of them. However, such a speed surprisingly does not alleviate any symptoms but could worsen them. Let us remind ourselves that structural reforms are subject to the time-inconsistency problem: demands that actors accept losses in the short-term for long-term promises of benefits, a situation many Albanian’s cannot afford.

The new government has already received the vote of confidence from the international community. After three years of repeated rejections, the EU Council has agreed to grant Albania candidate status. A half a billion euro deal was reached with the IMF to save the state and a similar deal was struck with the World Bank to save the energy sector. But the question here is; does the population support these speedily sweeping reforms? How informed is civil society about the outcomes of these changes? Rama has acknowledged that he will incur political costs but remains defiant. In his mind there is no dilemma – the state should consolidate; now or never. A recent poll conducted in urban areas suggests support for the government has declined in its first year in power from 58 per cent to 48 per cent. What happened to the honeymoon period?

In the context of the “zombie” economy, these necessary structural reforms are expected to make things much worse before they get any better. However, there is an alternative to limit their transitory costs. First, Rama should be sensitive enough to articulate the dilemma and second, the economy first needs a substantial boost. Finally, structural changes have to be implemented much more gradually.

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.