V Toward Economic Reform
- R. Johnston, Piroska Nagy, Roy Pepper, Mauro Mecagni, Ratna Sahay, Mario Bléjer, and Richard Hides
- Published Date:
- June 1992
Practically no economic reforms were introduced in Albania before 1990. In 1985, after decades of centralist rule, the Government started, albeit slowly, to move away from adherence to the principle of self-reliance. But only by the middle of 1990, in response to popular unrest, did the Albanian authorities acknowledge that the system of central planning had led to the accumulation of serious imbalances. Within the framework of the “new economic mechanism” adopted at that time, some limited measures were introduced, aimed at integrating Albania into the world economy and at promoting a gradual transition from central planning to a market-oriented system.
The Socialist Government formed after the March 1991 elections and the “national stability” coalition that took office in June 1991 opted for a gradualist approach to economic reform. Numerous reform initiatives were prepared, and some were discussed by Parliament. However, in spite of important breakthroughs, particularly in the privatization of agricultural activities, financial autonomy of state enterprises, and price determination, the pace of reform remained slow, and an uncoordinated, piecemeal approach prevailed in the design of the reform measures. Such measures were also inadequately publicized and slowly implemented by a weak economic administration. In the event, conflicts and delays in the reform process led to increasing dissent among the coalition parties, which culminated in a new government crisis in December 1991 and in the decision to move the general elections forward to March 1992.
Major and fundamental issues will have to be resolved by the authorities in their attempt to promote the transition to a market-oriented economy. Economic reforms have to be integrated into a comprehensive package that addresses the urgent need to stabilize the economy and at the same time promotes the removal of remaining restrictions. At the macroeconomic level, it is imperative to develop instruments and institutions to regain fiscal and monetary control and to introduce a market-based exchange rate system supported by tight financial and wage policies. At the microeconomic level, the authorities face the challenge of correcting a severe lack of financial discipline in the management of state enterprises, the persistent labor market rigidities, and the presence of little competition and limited private sector activities in most sectors of the economy.
External Sector Reforms
External sector reforms have focused on removing legal impediments to foreign credit and foreign investment and on partially liberalizing foreign trade and exchange restrictions.
In July 1990, two decrees (Decree No. 7406 “On the protection of foreign investments in the People’s Socialist Republic of Albania” and Decree No. 7407 “On the economic activity of enterprises with participation of foreign capital in the People’s Socialist Republic of Albania”) were approved by the Albanian Parliament, which lifted the constitutional ban on foreign borrowing introduced in 1976.48 The decrees allowed foreign direct investment, established legal protection against arbitrary expropriation and nationalization, and permitted joint ventures of foreign firms with Albanian enterprises and the remittance of profits abroad.49 Bilateral investment treaties were subsequently signed with various partner countries, and in August 1991 a Foreign Investment Agency was established under the Ministry of Foreign Economic Relations and made responsible for investment promotion and review of investment proposals.
In August 1990, Albania began liberalizing its trade and exchange system. Until then, foreign trade had been conducted exclusively through a small number of foreign trade monopolies under government control. After August 1990, all state enterprises were authorized to conduct foreign trade operations directly. In April 1991, following the Council of Ministers’ decision on privatization, the state monopoly on foreign trade ended, allowing private enterprises and individuals to conduct international trade operations independently. This gradual dismantling of the state monopoly on foreign trade was accompanied by the introduction (in December 1990) of a system of import and export licensing and limited foreign exchange retention rights, extended in April 1991 to export earnings of private enterprises. Since August 1991, exports and imports have been liberalized, except for a list of commodities requiring a specific license issued by the Ministry of Foreign Economic Relations, and except for a prohibition on the export of food items owing to widespread shortages. Since January 1991, all trade has been conducted in convertible currencies, all the bilateral payments agreements have been denominated in U.S. dollars, and the exchange rates for commercial and noncommercial transactions are no longer differentiated. Since September 1991, the official exchange rate has been pegged to the European currency unit (ECU) (at the rate of leks 30 = ECU 1), although in practice a peg to the U.S. dollar prevailed at the adjusted rate of leks 25 = $1 (up from leks 10 = $1 set at the beginning of 1991). With the loss of control by the Government over foreign exchange surrender requirements and the almost complete depletion of foreign exchange reserves, in early 1992 the official rate was further devalued to leks 50 = $1. Parallel market transactions in foreign exchange took place in increasing volume, with the market-determined exchange rate for the U.S. dollar rising from leks 40-43 in early November 1991 to leks 78-81 in February 1992.
Domestic Economy Reforms
Reforms of the domestic economy were aimed at modifying the legal and institutional framework regulating economic activities, allowing private initiatives, providing limited financial support for private sector development, and increasing the financial autonomy of state enterprises in relation to the budget. However, because price controls remained in place for most commodities until end-October 1991, the dismantling of the centralized system of resource allocation was not accompanied by the simultaneous introduction of clear market incentives. The protracted lack of price flexibility, the breakdown of the institutional framework for management, the work disincentives resulting from the continued payment of 80 percent of wages to idle workers, and the acute shortages of raw materials inhibited the supply response of the economy and contributed to aggravating financial imbalances.
Legal and institutional reforms considerably diminished the role of central planning and began to address the issue of ownership rights. In March-April 1991, the Government decided to abandon the traditional five-year plan and replace it by a set of annual indicative targets for 1991 under an “operational plan.” These indicative targets were set against the background of a rapid erosion of work discipline experienced since 1990 throughout the country. Also since March-April 1991, by Decree No. 7476 “On permission and protection of private ownership and private activities,”50 and through preliminary constitutional provisions approved by Parliament, private ownership of all types of property (except land initially)51 has been permitted and granted equal legal protection in relation to other forms of ownership, whether public, mixed, or joint.
Privatization was envisaged initially as consisting of private entry into small-scale industries, trade, and services. At the same time, splitting larger enterprises into smaller units was to proceed, and subsequently large-scale enterprises were to be sold to the public. (Decision No. 138 “On development of private activity,” approved by Parliament on April 3, 1991, required the Government to identify the sectors and the specific state enterprises to be privatized, but in practice, this process is still under way.) In legislation and decisions approved in August 1991, privatization was again addressed.52 Under the auspices of the newly created Preparatory Commission for the Process of Privatization (PCPP) and the National Privatization Agency (NPA), state enterprises were either to be auctioned, sold through shares, freely distributed through vouchers or shares (up to 30 percent of the enterprise value), or a combination thereof. The PCPP would be responsible for valuing state assets and state enterprises, and the NPA for intermediating between the state and the buyers and for effecting the final sale of state enterprises. The sale of state assets typically would proceed by giving the first option to buy to the enterprise employees, then by auctioning the property to all Albanian citizens, and finally, for unsold properties, by opening the auction to foreign individuals and companies. The proceeds were to be transferred to the state budget.
Nonagricultural private sector activities have increased, but to a limited extent. As of early 1992, only the privatization of small retail shops and other commercial services had progressed substantially, while only about 20 percent of state enterprises in the food industry were privatized.53 A number of new small-scale private trading activities were established throughout the country, giving rise to a rapid development of parallel markets. Financial support for the creation of private initiatives was undertaken in January 1991 through a specific medium-term credit program (involving a maximum ceiling of leks 40,000 for each investment project), but loans extended under this program remained throughout 1991 an insignificant proportion of total domestic credit.
Reforms proceeded more rapidly in the agricultural sector, and in the trade of agricultural products. Since mid-1990, legal parallel markets have been allowed for agricultural produce of private plots, which had previously been cultivated by cooperative members for self-consumption. Prices in these markets have been market determined, and the volume of transactions has risen first as a result of the increase in the size of private plots for cooperative members, and, after the first quarter of 1991, through the spontaneous breaking up of agricultural cooperatives. The criteria for the distribution of land and other property of cooperatives (which owned about 75-80 percent of arable land) were set by the Council of Ministers in August 1991, after a distribution of part of the livestock among cooperative members. As of mid-1992, about 70-75 percent of arable land previously controlled by cooperatives had been freely distributed to private occupants. Land could be transferred to descendants, but legislation approved in July 1991 prohibited its sale. In addition, severe inadequacies in the transportation, distribution, and marketing facilities for agricultural products continued to hamper the development of farming activities. The reform of state farms had yet to be initiated as of mid-1992.
After the middle of 1990, a number of reforms were introduced to increase the financial autonomy of state enterprises.54 In essence, these measures influenced the financial flows between state enterprises and the state budget, in an attempt to make enterprises responsible for their investment decisions. Specifically, the proportion of an enterprise’s retained profits increased from less than 10 percent to 90 percent, while investments, completely financed by the budget before the reform, were to be financed by the enterprise’s own funds and by bank credit. Financial dependence on the state budget still applies for large investment projects, such as irrigation infrastructure in agriculture and hydroelectric power plants, as well as for research activities. Losses once fully covered by the budget were to be financed by bank credit in the first year, and their continuation for a second year would lead, in principle, to the enterprise’s bankruptcy. (No bankruptcy laws had been approved by mid-1992.) In practice, however, bank credit continued to be unconditionally extended to insolvent state enterprises. In addition, the decentralization of production, pricing, and wage setting decisions were legally addressed only in the last quarter of 1991. The bill on state enterprises published in October 1991 sanctioned in principle their autonomy regarding structure of production, level of work force employed, the setting of wages and prices, and the freedom to produce on a contractual basis. However, important restrictions remained. The state continued to have the right to place orders up to two thirds of the productive capacity, and up to 100 percent in specific sectors. Employment decisions remained subject to the control of branch ministries or local authorities. Pricing decisions were administratively restricted, in spite of partial price liberalization measures introduced in November 1991. A significant range of commodities remained under price controls, but implementation was limited by the weakening of the administrative structures in 1991 and early 1992.55
Although as of mid-1992 major steps still needed to be taken by the Albanian authorities for the stabilization and structural reform of the economy, the clear electoral victory of the political party most committed to reform should accelerate the reform process.
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The entire 1976 Constitution was subsequently abrogated on April 29, 1991, and pending the adoption of a new constitution, which is currently being drafted, Parliament (elected in March 1991) adopted Law No. 7491, entitled “Principal Constitutional Provisions,” which confirmed the liberalization measures introduced in these decrees.
Tax incentives for the formation of joint ventures with foreign capital investment included reduced profit tax rates for a period of two years.
The protection of private property, private economic activities, and foreign investment was confirmed in legislation adopted in August 1991.
Decree No. 7476 envisaged land use as remaining regulated by leasing contracts under state ownership. Private use and ownership of land has in principle been permitted by Law No. 7501 of July 1991, but transfer of land remains restricted.
The Law on Privatization approved by Parliament on Au-gust 15, 1991, and decisions of the Council of Ministers Nos. 300 (August 28, 1991) and 307 (August 29, 1991).
The monitoring of privatization remains disorganized, however, and little control is exercised over the transfer of private proceeds to the budget.
The reforms of state enterprises in industry initiated in July 1990 were also applicable to state farms and to state enterprises in the construction and internal trade sectors.
Commodities remaining under price control included (a) 12 food items and 14 nonfood items whose retail prices were administratively set by the Council of Ministers; (b) 12 food items and 5 nonfood industrial items whose wholesale prices remained administratively set by the Council of Ministers; and (c) 10 nonfood industrial items whose wholesale prices were set by the Ministry of Finance.