IV Political and Economic Developments in 1991

R. Johnston, Piroska Nagy, Roy Pepper, Mauro Mecagni, Ratna Sahay, Mario Bléjer, and Richard Hides
Published Date:
June 1992
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The critical condition of Albania’s economy deteriorated further in 1991. As existing institutional structures collapsed, inappropriate financial policies and social unrest exacerbated macroeconomic imbalances and impaired output growth.

During 1991 three governments came to power. After the first free elections in 45 years, the Party of Labor (later renamed the Socialist Party) supported by rural votes formed a government in April. Following large-scale strikes and protracted unrest, in early June a new coalition government of “national stability” (comprising members of all parties, including the Socialist and the Democratic Party) was formed. Members of the Democratic Party held most of the key economic positions and were primarily responsible for initiating new economic policies and introducing legislation on economic reforms. However, in early December, the Democratic Party members of the coalition government resigned, accusing the Socialist Party of stalling legislation on political and economic reform. A new caretaker government was then formed, with technocrats, independent of party affiliations, assuming most ministerial positions. New general elections were held in late March 1992, with the Democratic Party defeating its closest rival, the Socialist Party, by a large margin, and winning the elections by a clear majority.

The data on economic developments in 1991 are highly tentative, as the reporting system was adversely affected by the breakdown in administration and the rapid emergence of unrecorded parallel market transactions. Gross output is officially estimated to have declined by about 24 percent in agriculture and 37 percent in industry. Aggregate supply constraints that affected all sectors of the economy were largely reflected in food shortages, production stoppages, and the inability to import essential inputs. In contrast, domestic demand continued to increase sharply, stimulated by large nominal wage increases and a loss of control in the fiscal and monetary areas.

Food shortages became widespread. Crop production is estimated to have dropped by more than 35 percent, with maize and wheat registering the worst declines. The “spontaneous privatization” that resulted in the dismantling of agricultural cooperatives (which owned 75-80 percent of the arable land during the 1980s), and the uncertainty about ownership rights as well as continuing shortages in fertilizers, seeds, pesticides, insecticides, and spare parts for machinery and equipment sharply constrained farming activities. As a result, large areas of field crops were not sown, inducing substantial declines in crop yields. Livestock production in 1991 declined marginally, by about 7 percent compared with 1990, since live animals were distributed relatively early to cooperative members.

In addition to low production, the availability of food was further impeded by the breakdown of the state distribution and marketing system. The role of the grumbullims, the state distribution entities, diminished considerably, as farmers preferred to sell their products in emerging free markets, and the services rendered by the machine and tractor stations deteriorated sharply. Hence, in 1991, free agricultural markets for inputs and output did not fully develop, and the organized system through which the former cooperative members bought inputs and sold their products collapsed. The severe inadequacy of transport aggravated the situation.

Following attempts by nearly 40,000 Albanians to flee to Italy during 1991, and in response to the Albanian Government’s request for food aid, the Group of Twenty-Four (principally Italy) responded by committing over $200 million in food and commodity aid, of which a substantial sum has already been disbursed by Italy.

With social unrest persisting and essential inputs unavailable, gross industrial output in 1991 is estimated to have reached roughly 60 percent of the previous year’s level. Production, in food, light industry, and some areas of heavy industry (cement, machinery and equipment, and spare parts) sharply declined, with the result that state shops were unable to meet the demands for nonfood items as well. In fact, by the third quarter of 1991, there was increasing evidence of private markets supplying goods from neighboring Greece, Yugoslavia, and Italy.

Most state enterprises had either shut down or were operating at very low capacity by end-1991. Consequently, about 115,000-130,000 employees were inactive, although the wage policy in force ensured that they continued to receive 80 percent of their wages. Moreover, as a result of political pressures, wages and salaries of all state employees (including those not working) were arbitrarily increased by over 50 percent in 1991. Thus, substantive across-the-board wage increases had actually preceded wide-ranging price liberalization measures. These wage increases are expected to result in a nearly 25 percent increase in money incomes in 1991 whereas expenditures will decline by 15 percent owing to acute shortages in goods and services. The number of registered unemployed also increased, from 33,200 at end-1990 to 78,500 at end-1991.

At the root of Albania’s financial imbalances during 1991 was the dramatic worsening in its fiscal position, arising primarily from price and enterprise subsidies, wage increases, and the collapse of an outdated and ineffective revenue mobilization mechanism. The 1991 budget deficit before grants was about 34 percent of GDP on a commitment basis.

The accommodation of excess demand by a passive monetary policy contributed to a liquidity overhang, fueling inflationary expectations, particularly in the first half of the year when most prices were still controlled. In 1991 the velocity of broad money declined by 40 percent. Most of the growth in money supply was reflected in cash held by the public, as interest rates, although marginally raised in the fourth quarter, continued to be fixed at very low levels, and transaction costs associated with withdrawing and depositing cash remained high. Consequently, the 12-month rate of growth of currency in circulation accelerated to about 170 percent by the end of 1991. Household liquidity increased by about 140 percent, reaching a level equivalent to about 47 percent of GDP.

Although official prices continued to be largely controlled, increases in aggregate demand had put an upward pressure on prices. After remaining virtually fixed for several decades, some consumer prices were officially liberalized in November 1991 (excluding a basket of commodities with a weight of 40 percent, which remained controlled throughout 1991 and the first half of 1992) and were roughly estimated to have increased on a 12-month basis by 104 percent by December 1991. The impact of partial price liberalization in November 1991 led to a further acceleration of inflation in early 1992.

As a cumulative result of the disruptions in the production and distribution systems, continued controls on prices and the exchange system, and the lax financial policies, the worsening external position was inevitable. Exports fell rapidly, by more than 40 percent, constraining the country’s ability to import essentials; a cutback was particularly evident in the areas of raw materials, machinery, spare parts, and intermediate inputs, as available foreign exchange was used primarily to import food. Moreover, inappropriate external reserve management led to a virtual exhaustion of foreign reserves and to the accumulation of sizable arrears on external payments. With the deterioration of financial imbalances and the rise in open inflation, the economy became increasingly “dollarized.”

During 1991, Albania portrayed a grim picture of poverty and economic decline in Europe. Even though it was trying to shed its legacy of economic and political isolation, its starting conditions and reform prospects were daunting. The administrative system had virtually collapsed and social unrest and crime were on the rise. Despite its poor economic performance and against many obstacles, the authorities nevertheless made efforts in effecting liberalization measures, particularly those relating to structural reforms in the agricultural sector. The progress made in Albania’s economic reform program is examined in the following section.

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