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Albania: Selected Issues

Author(s):
International Monetary Fund. European Dept.
Published Date:
June 2016
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External Competitiveness1

Albania has significant potential to improve its export competitiveness. It has proximity to both European and emerging markets, access to the Mediterranean, a young population relative to the rest of Europe, and natural resources that remain to be fully tapped. However, Albania’s competitiveness has shown narrow improvements over the past 5 years, with weak productivity growth and continued concentration in low-skilled labor-intensive sectors with limited value added. Recently, the authorities have taken steps forward but need to accelerate efforts to encourage investment in higher value-added products by implementing further structural reforms to enhance the business environment, address infrastructure gaps, and improve labor skills. Increased exchange rate flexibility would also help support external re-alignment (see External Sector Assessment), which may further boost export growth.

A. What Do Indicators Say?

1. Several broad-based cross-country indicators are commonly used to measure competitiveness. Two such indicators are the World Bank’s Doing Business Report and the World Economic Forum (WEF) Global Competitiveness Report. The WB’s Doing Business indicators cover various areas ranging from the legal regime for contract enforcement to regulatory processes for registering businesses, paying taxes, getting credit, and trading across borders. The WEF competitiveness indicators cover a wider range of criteria including infrastructure, institutions, education, labor market efficiency, as well as innovation, business sophistication, and technological readiness. Rankings in such reports are a proxy for countries’ competitiveness with higher rankings signaling better competitiveness.

2. These rankings show that Albania has been closing the gap with EU new member states (NMS), but also that competitiveness convergence has slowed down in the last few years. While Albania improved its rankings during 2008–11, the pace of improvement has decelerated more recently (see Figure 1 and 2). Regional peers such as Macedonia and Montenegro were able to converge faster towards NMS rankings. There remains a significant gap between Albania and the NMS and therefore there is scope for significant gains from reforms to improve the business environment.

Figure 1.Doing Business

(Ranking; 5-years moving average)

Source: World Bank, Doing Business Reports.

Figure 2.Global Competitiveness Report

(Ranking; 5-years moving average)

Source: World Economic Forum, Global Competitiveness Report.

3. These indicators suggest that Albania needs to address governance and infrastructure weaknesses. In particular, the country’s competitiveness has been limited by the following constraints:

  • Infrastructure gaps constrain trade. Insufficient road maintenance is a key challenge. Several road projects aiming to reduce transportation costs and connect neighboring countries are pending (e.g., Arberi Road connecting Albania and Macedonia). Albania also has infrastructure gaps in telecommunications, ports, railroads, and airports relative to new EU members.

  • Unreliable energy supply hampers efficiency. While Albania is rich in hydropower, electricity supply is prone to blackouts. This is a key constraint as electricity is an important input for many industries. Power outages averaged 112 hours per consumer in 2014, far above the CESEE average of 3 hours. There has been improvement recently as a result of the government’s energy sector recovery plan, although its implementation remains at an early stage. Propane is a key input to develop chemical and plastics industries. The lack of a transport network and of low-cost supplies has blocked the development of such industries until now. The Trans-Adriatic Pipeline is expected to be completed by 2019 and should overcome these bottlenecks.

  • High informality contributes to low productivity. More than 40 percent of firms report facing informal competition. The large informal sector is a constraint to investment, has a short-term perspective, and lacks access to credit. Low levels of physical and human capital keep productivity low.

  • Weak institutions hamper the rule of law. The judiciary system is unable to protect property rights and enforce contracts, and undermines the business environment fostering myopic business strategies and high profit margins to insure against legal risks.

  • Corruption undermines competitiveness. The WB-EBRD Enterprise Survey 2013 highlights corruption as one of the main obstacles for business. This issue combined with weak protection for property rights reduce the incentives for business activity. Fighting corruption is a long term process and the Albanian government is taking steps forward as it is a precondition for EU accession.

  • The complexity of the tax system places a substantial burden on business. The number of tax payments and hours needed to pay taxes are 19 and 43 percent, respectively, higher than the Western Balkan average.

4. To address these weaknesses, the Albanian government has undertaken some recent initiatives which include:

  • The Law on Strategic Investments sets up a one-stop window to facilitate large investments. It accelerates licensing and the resolution of operational issues such as land consolidation, use of state-owned land, and infrastructure coordination.

  • The Law on Tourism aims to standardize the sector, reduce red tape, and coordinate tourism activities with local governments. It also allows the leasing of state-owned land for 99 years.

  • The Law on the National Business Center merged the National Registration Center and the National Licensing Center. This reduces the administrative burden by creating a single entity for registration and the issuance of special licenses.

  • The ongoing campaign against tax evasion, non-compliance, and informality is trying to level the playing field for law-abiding businesses.

B. Export Trends

5. Over the past decade, Albania has increased its market share in global export markets, mainly due to oil and minerals. However, oil production is expected to be subdued in the near future, given lower oil prices.2 In the non-oil sector, gains in export market share over the past decade have been modest (Figure 3). In the textiles and footwear sector, which represents the largest export sector after fuel and minerals, there have been no significant gains over the past decade (Table 1).

Figure 3.Albania: Share in World Export Markets

(Percent)

Sources: INSTAT; World Bank, WITS database; and IMF staff estimates.

Table 1.Market Share of Albanian Exports(In percent of World exports of each sector)
2005-09

(a)
2010-14

(b)
(c)=(b)-(a)
Food, beverages, and tobacco0.006%0.007%0.0007%
Minerals and metals0.011%0.019%0.0078%
Fuels0.003%0.015%0.0115%
Chemicals and plastic prod.0.000%0.001%0.0003%
Wood and paper0.007%0.012%0.0047%
Textiles and footwear0.055%0.055%−0.0004%
Machinery0.001%0.001%0.0003%
Others0.002%0.002%0.0003%
Sources: INSTAT; World Bank, WITS database; and IMF staff estimates.

6. Albania’s exports are concentrated in low value-added sectors, which may face headwinds over the medium term. Albania’s non-oil exports continue to concentrate in low-skilled labor-intensive sectors (such as textiles and footwear), where Albania’s proximity to European markets has encouraged growth in the in-sourcing industry. However, Albania could be facing headwinds from the growth slowdown in Europe and the decline in transport costs, which places it in competition with countries that have large textile sectors with lower labor costs such as Bangladesh, Cambodia, and Vietnam (Figure 4).

Figure 4.Textile and Footwear Exports and Income, 2010-14

1/ Includes the 20 countries with the highest share of textiles in their exports.

Sources: World Bank, WITS database; IMF, WEO; and IMF staff estimates.

7. In order to achieve faster growth, a more rapid transition to higher value-added exports will be necessary. Albania’s export sector is narrowly focused on oil, minerals, and textiles and footwear (Figure 5). In contrast with some of its regional peers such as Macedonia and Serbia, it has yet to diversify its export base into higher value-added products such as chemicals, plastics, or machinery. In Macedonia, export diversification was led by FDI in the tradable sector and a favorable business climate which helped integrate exports into the supply chains of Western European manufacturers. Given the challenges ahead in the oil sector and the significant headwinds in textiles, Albania will need to step up reforms to improve investment prospects and attract FDI that allows it to diversify into higher value-added products.

Figure 5.Western Balkans: Structure of Goods Exports

(Pecent; 2010-14)

Sources: World Bank, WITS database; and IMF staff estimates.

C. Labor Productivity and Wages

8. Unit labor costs remain low by CESEE standards. Average unit labor cost was 79 percent of the CESEE median (Figure 6). While at €380 per month in 2014, Albania’s average wage is around 50 percent of the CESEE median3, productivity is also low compared with the rest of the region (Figure 7). Output per worker in Albania is around 62 percent of the CESEE median.

Figure 6.Unit Labor Cost

(Percent of the CESEE median; 2014)

Sources: HAVER; INSTAT; OECD; and IMF staff estimates.

Figure 7.CESEE: Average Wages and Productivity, 2014

Sources: OECD; HAVER; IMF, WEO; and IMF staff estimates.

9. Albania’s unit labor cost has fallen marginally in recent years, mainly reflecting a decline in real wages. The decline in real wages has offset the slowdown in labor productivity growth (Figure 8). The decline in wages partly reflected the weakening of labor demand following the slowdown in activity triggered by the Greek crisis in 2010. At the same time, labor supply has been expanding and exerting downward pressure on wages. The increase in labor supply is driven by migration from rural to urban areas and a drop in remittances which incentivizes people to join the labor force. New government employment offices in rural areas have also contributed to expanding labor supply by facilitating job searches.

Figure 8.Albania: Real Unit Labor Cost, Real Wages, and Productivity

(2010=100)

Sources: OECD; HAVER; IMF, WEO; and IMF staff estimates.

10. Holding the minimum wage steady for the past three years has also helped contain wage growth (Figure 9). The minimum wage has fluctuated within a band of 40–50 percent of the average wage over the past 10 years, which is relatively high by regional standards. In 2014, the ratio of the minimum wage to per-capita GDP was one of the highest in Europe (Figure 10). Hence, although the low growth in minimum wage has limited the spillover to the wage-scale, it may be adversely affecting competitiveness in labor-intensive exports and undermining youth employment.

Figure 9.Albania: Wages

Sources: INSTAT; and IMF staff estimates.

Figure 10.Minimum Wage

(Percent of GDP per capita, 2014)

Sources: Haver Analytics; OECD; and IMF staff estimates.

11. Skill shortages remain a key structural challenge. According to the World Bank’s Enterprise Survey, around 60 percent of Albanian firms during 2007–13 reported that lack of properly educated workers was an obstacle (Figure 11). This percentage is higher than in Macedonia and Montenegro. The severity of the shortage of skilled labor has declined since 2007, in part due to cyclical factors. Nevertheless, this has created a bottleneck for growth. The lack of skilled workers is more severe in the tradable sectors—manufacturing and tourism—than in nontradable sectors, such as construction and retail trade.

Figure 11.How Much of an Obstacle is an Inadequately Educated Wokforce?

12. The high youth unemployment rate is another symptom of skill shortages. The gap between the youth and headline unemployment rate increased from 6 percentage points in 2007 to 15 percentage points in 2014 (Table 2). This implies that the educational system is not providing the appropriate skills needed to join the labor market. A relatively high minimum wage is an entry barrier for young people entering the labor market. The long-term unemployed account for more than half of unemployment, which points to structural problems in the labor market.

Table 2.Labor Market Statistics, 2014
AlbaniaWestern Balkans1EU New Member States2
Unemployment rate17.925.710.0
Long-term unemployment rate311.220.15.2
Youth unemployment rate432.552.123.4
Sources: National statistics offices; Eurostat; and IMF staff estimates.

13. Policies to improve competitiveness should focus on improving the quality of education and developing entrepreneurial skills. The 2012 PISA survey ranks Albania at the bottom of the distribution—20 percent below the CESEE median. The Global Entrepreneur Index ranks Albania 39th out of 40 European countries. Aversion to risk and innovation is the main obstacle to an entrepreneurial culture.

D. Conclusion and Policy Recommendations

14. Albania’s exports may face headwinds in the near future. Albania’s textile and footwear sectors will find it difficult to expand, given competition from large low-cost Asian producers. In recent years, export growth was driven by the oil sector, but lower oil prices represent an important challenge given Albania’s high costs of oil production.

15. Structural challenges limit the potential for investment and diversification into new sectors. Policies to address these issues include:

  • Complete key infrastructure projects to reduce transportation costs and improve the energy supply.

  • Improve institutions to strengthen the rule of law. Reform of the judiciary system and of land property rights should be the top priorities.

  • Broaden the tax base to make the tax system more efficient, encourage compliance, and reduce informality.

  • Improve labor market efficiency by containing the minimum wage and implementing policies to reduce skill shortages.

Prepared by Ezequiel Cabezon and Kareem Ismail.

Due to its geological specifics, Albania is a high-cost oil producer. This implies that oil price shocks have a bigger impact on Albania’s oil production than on production in other regions.

The average wage is proxied by the average public sector wage, because measures of private sector wages are unreliable given the large informal payments over the formal wages.

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