II The Pre-Reform Economic System
- R. Johnston, Piroska Nagy, Roy Pepper, Mauro Mecagni, Ratna Sahay, Mario Bléjer, and Richard Hides
- Published Date:
- June 1992
A complete chronological description of the evolution of the Albanian economic system is precluded by the very tight controls on information that existed over a long period. Consequently, few, if any, documents are available to help in constructing a comprehensive and accurate picture of Albania’s modern economic history.
It is known that at the end of World War II Albania was predominantly an agricultural society with practically no industrial base, and that its substantial natural resources were largely untapped. Following the advent of the communist regime in November 1944, Albania’s economic performance and its economic system were influenced mostly by political and ideological factors. From that time, the economic system evolved strictly along the lines of the classic Stalinist model: central planning dominated all economic activity, decision making was strongly hierarchical, and the achievement of physical production targets became the primary goal of economic policy. This model, with few changes, prevailed until mid-1990.
Evolution of Stalinist System
A distinctive feature of the Albanian economy was that virtually all productive units became, over time, either state or collectively owned and private property virtually disappeared. The first economic step of the socialist government was to nationalize all public utilities and foreign capital in 1946. Local businessmen were taxed at prohibitive levels, resulting in the expropriation of their property. By early 1947, the state had taken over domestic industry and foreign trade.
In the agricultural sector, in accordance with the agrarian laws of 1945-46, the communist government confiscated all large estates and redistributed them among farmers, limiting the maximum size for each family holding to five hectares. Contrary to developments in the industrial sector, collectivization of agriculture was slow: it started in 1946, gained momentum after 1955, and was completed only in 1967. This pace was largely the result of the rugged Albanian terrain, which is not suitable for collectivization. The Constitution—adopted in 1976—legalized the nationalization of all land, including agricultural land. A holdover from private activity remained—cultivation by cooperative members for their own consumption on small plots and the raising of livestock on these plots. In 1981, however, livestock-rearing was also subjected to forced collectivization, which, in turn, led to mass slaughtering and drastically reduced the meat supply in the ensuing years.
Internal trading activity was fully state owned and controlled until mid-1990, and external trade until April 1991. External trade was carried out by a few state enterprises specializing in foreign trade. Domestically, consumer goods were distributed through shops and store outlets of the internal trading state enterprises and also, to a limited extent, by cooperatives. The provision of social services, such as education and health services, was also fully vested in the state. In addition, practically all houses in urban areas and those occupied by state farm workers were constructed and owned by the state. In contrast, houses in the cooperative sector were owner financed and belonged to cooperative workers.
By 1951, practically all forms of market mechanism in Albania had been replaced by central planning. All economic decisions on production, pricing, wage setting, investment, and external trade were centralized and implemented within the context of five-year plans. Prices and wages were fixed and remained largely unchanged throughout each planning period, and changes between the plans were generally minimal. The domestic price of traded goods was largely insulated from external influences by a system of taxes and subsidies.
A four-tier decision-making hierarchy was instituted. At the highest level was the Council of Ministers, followed by the branch ministries, executive committees (equivalent to the local government), and state enterprises. Branch ministries functioned at the national level, and executive committees at the district level. Executive committees were in charge of all the enterprises in each of the 26 districts and generally reported to the appropriate branch ministries. Since information flowed strictly vertically, the intermediate levels were in frequent negotiation with the Council of Ministers and the state enterprises.
Box 2.Strengthening of State Control: New Constitution of 1976
To replace the Constitution introduced in 1946 and revised in 1950, Albania adopted a new Constitution in 1976. The “new economic order” set out in this Constitution effectively isolated the country from the rest of the world and extended the state’s control over virtually all aspects of the lives of its people.
The new Constitution was unique in many respects. Drafted by a commission headed by Enver Hoxha, it sanctioned the one-party system in accordance with Marxist-Leninist doctrine. The Albanian Party of Labor (APL) and the state became completely intertwined; for example, the First Secretary of the Party’s Central Committee was designated commander-in-chief of the armed forces, thereby controlling any potential threat to the APL. Albania was the only communist country that had officially abrogated institutionalized religion in 1967; the Constitution of 1976 legalized this decision.
A ban on credit and investment from abroad, unparalleled in any other country, was introduced. The concept of a “socialist economy” based on the socialist ownership of all means of production was introduced by abolishing all but minimal categories of personal property.
Although the Constitution guaranteed the citizens certain inalienable rights, such as equal treatment under the law, work, rest, and health, as well as freedom of speech, press, organization, assembly, and public demonstration, opinion contrary to the APL’s ideology was totally suppressed. Because a very small percentage of the population (less than 4 percent in 1990) were members of the APL, the party depended considerably on mass organizations, primarily those of youth, women, and labor unions, to achieve its goals in the political, social, and economic spheres.
The State Planning Commission (SPC), directly subordinate to the Council of Ministers, was in charge of formulating a detailed plan prescribing the physical quantities to be met by each productive unit. The SPC drew up the country’s first national plan, the nine-month plan of April-December 1947. This plan was relatively simple, with no global indicators for the economy. Subsequent plans during 1948-501 became progressively more complex, with macroeconomic targets for growth and investment and detailed planning of physical output, material balances, and input utilization norms for enterprises.
The country’s First Five-Year Plan was prepared with Soviet assistance and launched in 1951. There was a clear bias in favor of industry, particularly heavy industry and the mineral sector. By 1959, the complete Soviet system of plan indicators was adopted, including lists of projects, global output, output mix, input requirements, use of productive capacity, volume and structure of capital investment, labor productivity and employment, training of new workers, wage fund, average wages, unit production costs, and sales. Few changes were introduced until very recently.
Goods shortages frequently emerged, and rationing was used to allocate goods among consumers. Before 1957, the Government operated a dual-pricing system for consumer goods whereby a ration or a “ticket” amount could be obtained at low prices, and further supplies were frequently available at higher, although still administratively set, prices. In 1957, on Soviet advice, the Government unified agricultural prices and raised them to levels between those prevailing in the two markets. These prices have remained largely unchanged, setting the base for increasing subsidies from the budget. A one-time wage adjustment was also given in 1957 to offset the impact of the price increases, and no significant price and wage policy changes have occurred since.
As in other centrally planned economies, labor mobility has been low. Each enterprise had a well-defined employment structure and was allocated a fixed number of workers, paid from a centrally determined wage fund. Since full employment was an explicit government goal, it was not uncommon for the Government to increase the number of workers in an enterprise without a corresponding increase in labor demand by the enterprise. Workers were frequently expected to work overtime on a “voluntary” basis to compensate for their low productivity.
The state budget was tightly linked to the financial position of the state enterprises. Before the mid-1990 reforms, more than 90 percent of the profits and close to 70 percent of the amortization funds of state enterprises were administratively transferred to the budget. In turn, the budget was responsible for financing all state enterprises’ investments and for covering all their losses. Because domestic prices of traded goods were fixed domestically, the losses and profits from foreign transactions were also reflected in the budget.
Money and credit played a passive role. There was no monetary policy as such, with the central bank (the State Bank of Albania) merely transferring resources for meeting the plan targets. All transfers between the budget and the state enterprises, as well as between the enterprises, were routed through the bank. In effect, the bank provided a check on the activities of state enterprises to ensure that the plans were being appropriately implemented.
Until August 1990, foreign transactions were fully centralized. An annual foreign exchange budget or plan approved by the Government set out the planned total value of exports and imports in the domestic currency (leks), as well as the enterprise targets for exports and their quotas for imports in convertible and nonconvertible currencies. No customs duties or tariffs were applied to exports and imports under the foreign exchange plan. The State Bank of Albania had a foreign exchange monopoly until 1990, as all foreign exchange transactions had to be routed through, and foreign exchange surrendered to, the bank.
After the Second World War, the official value of the lek was established on the basis of its gold content. Official exchange rates (quoted against the dollar and the ruble) were announced and used for accounting and statistical purposes up to 1985, and commercial exchange rates were announced and used for these purposes thereafter. Although before 1986 commercial exchange rates were also calculated (but not announced), they were known as “economic exchange rates.” Since domestic prices were set independently of international prices,2 these economic exchange rates were used to convert prices of traded goods quoted in foreign currency to their lek equivalents. They were calculated for the dollar and ruble by relating the value of the exports in leks (wholesale prices times quantity of exports) to the export value received in foreign currency. Different exchange rates were also applied to a limited list of noncommercial transactions.
Economic Organization of Enterprises
Two principal forms of productive units existed in the economy: state enterprises operating in the agricultural, industrial, and trading sectors, and agricultural cooperatives.
The state enterprises were typically horizontally and vertically integrated and were therefore very large. Average employment levels were more than 700 workers per enterprise in 1989, with the largest enterprises employing more than 4,000 workers. Until 1947, state enterprises operated as budgetary institutions; their expenses were covered by the state budget, and all their output was surrendered to the Government. Beginning in 1948, the Government moved the state enterprises out of the budget and made them into “self-accounting enterprises,” but without autonomy and fully subject to central planning.
Like other government institutions, the internal organization of the state enterprises has been hierarchical. The enterprise directors had no economic decision-making power and relied completely on directives from the relevant branch ministry or the executive committee. While investment decisions were made by the state and channeled through the state budget, all other inputs were supplied in accordance with the central plan of the branch ministry or the executive committee.
As a result of growing dissatisfaction among workers in the mid-1960s, Hoxha launched a “Cultural and Ideological Revolution” whose objective was to strengthen control by the Albanian Party of Labor (APL) over all aspects of society. To placate dissatisfied enterprise workers, an attempt was made in 1965 to increase incentives by streamlining the planning process. Henceforth, instead of receiving a detailed plan from the state hierarchy, workers were induced to discuss broad plan targets, which would then be sent to the higher authorities for approval. The ultimate decision-making power, however, remained with the central planners.
Some attempts at decentralization of decision-making were also introduced in the state hierarchy; primary responsibility in many areas shifted from the Council of Ministers to the branch ministries and the executive committees. In 1960, only 20 percent of the enterprises were under the jurisdiction of the executive committees; this number had increased to 40 percent in 1969 and to 80 percent in 1971. Unlike other Central and East European countries, however, the position of Albanian managers continually deteriorated. During the late 1960s and the 1970s, the typical manager faced several salary cutbacks. With the introduction of workers’ participation, the managers’ authority over the activities of the state enterprises diminished. Not only were they under pressure from the state hierarchy and the workers’ organization to set high targets, but they were also held responsible for underachievement and poor performance. Moreover, conflict between managers and workers on questions of underachievement was strongly discouraged. Poor performance by workers was always explained—not by the lack of economic incentives—but by inadequate ideological indoctrination of the workers. Although these changes seem to have been successful in ensuring popular support for the APL, they had little impact on the system of incentives or on economic decision making, which continued to be concentrated in the state hierarchy.
Before 1985 there were no penalties for enterprise losses, but thereafter a system of points was established based on realized production, proportion of contracts met, costs incurred, and workers’ productivity. If the enterprise recorded a number of points below a critical level, salaries could be cut up to 10 percent annually. There were, of course, no provisions for bankruptcy during this period.
Agricultural cooperatives differed from agricultural state enterprises mainly in terms of their financial relationship with the budget (less than 10 percent of their profits were transferred to the budget while most of their investments were financed either by bank loans or were self financed) and in terms of their wage policy (internally determined and a function of the revenues they generated). Although plan targets set for the cooperatives were meant to be indicative, the cooperatives were usually compelled to implement them.
A one-year plan was adopted in 1948, followed by a two-year plan in 1949-50. The main objective of the two-year plan was to repair war damage and restore the economy to its prewar level.
An exception was made in setting domestic wholesale prices of imported capital goods (Section III).