fourth conference ''albanian economy: performance and policy challenges''

Saranda, 11 - 12 SEPTEMBER 2003

Press release and the conclusions of the Conference

During the two days of the Conference “Albanian economy: Performance and policy challenges”, organized by Bank of Albania with the cooperation of Economic Faculty, University of Tirana, there were analyses of the developments in the market economy, balance of payments, transition economics and on the monetary policy.

The Conference provided brainstorming on how to reduce the size of the informal economy in Albania, the reduction of the balance of payments deficits, the efficiency of the public sector on the phase of our transition economy and the efficiency of the monetary policy in particular, in order to achieve a macroeconomic and financial stability. Nevertheless, according to the participants in the conference, this stability should not harm or impede the business development on the development of the overall economy.

The central aim of the transition process has been to transform entirely the system of centrally planned economy toward a system of decentralised decision making of market economy and to reach and preserve macroeconomic equilibriums. The experience, so far has shown that achieving this aim requires more than just liberalising the markets. The institutions that support the new market economy need to be more established and consolidated as well. The institutional reforms in transition economies, however, have proved to be more complex and time consuming than anticipated. This slow progress of the institutional reforms seems to be responsible for the inadequate development of many economic sectors discussed in this conference.

The scale of informal economy in Albania has reached levels of becoming an obstacle to economic development by seriously restricting the role of government through its fiscal policy. The process of transformation of informal economy toward the formal economy according to Mr. Olters requires the provision of better “public goods” and development of a credible anti-evasion action plan. On the other hand, the sustainability of current account deficit is threatened if structural reforms aimed at increasing Albanian foreign competitiveness and the substitution of imports with domestic production are not implemented.

From the analysis of Mr. Nicols although Albania has strengths in relation to geography, integration and the policy framework it has problems in relation to institutions, and in particular with the property rights and business friendly bureaucracy. He urges that unless, these issues are tackled urgently and with conviction, there is a major danger that the “free market” approach will be transformed into “crony capitalism”, where those with connections get the benefits, while other lose out, which is not an option for sustained development.

So, as emerges from these discussions the institutional consolidation is the main challenge Albania and other transition economies face at this stage of transition. This is not to say that other policy areas such as monetary policy and financial development have less of importance at this stage of transition. Despite the macroeconomic stability achieved in Albania, several challenges stand ahead in order to increase the effectiveness and the role of monetary policy, as it was argued in the presentation of the last session. Also the experiences of other countries, discussed today in the last session, have revealed several difficulties in achieving the macroeconomic stability through tough monetary policy regimes without jeopardizing other foreign and domestic equilibriums.

This conference suggests several policy conclusions. Five major themes for future policy directions may be identified.

First, an economic policy and philosophy is needed that view the relationship between the government and markets as complementary both working in partnership, and recognised that while markets are at the centre of the economy, there is an important, although limited, role of government to play.

Second, the government has an important role to play in creating and maintaining the economic growth. The time has come to really understand the crucial role of public sector, especially in depression periods and in presence of market failures.

Third, the business environment in Albania needs further improvement to promote exports and FDI which in turn are necessary to maintain foreign equilibrium and a sustainable economic growth.

Forth, business community should commit itself in respecting the rules of the market economy and fair competition, as well as, the rules of law. They should increase the transparency of their activities and understand that their partnership with the authorities is the key to overcome the many problems the economy is currently facing.

Fifth, the Banks of Albania should continue to develop its ability to analyse economic developments in setting monetary policy in order to maintain the macroeconomic and financial stability without hampering the economic development.

Sixth, financial system being at the hart of market economy requires particular attention in order to boost the much needed credit for the development of small and medium enterprises.

The opening speech of the fourth Conference

Dear Ladies and Gentlemen,

I am really glad to greet the honorable guests of this conference, friends and colleagues of mine, those who have continuously assisted in our previous conferences and those participating for the first time this year. It is a great pleasure for me, that in the name of the organizers of the conference “Albanian economy: Performance and policy challenges”, to express gratitude and respect to the dear friends of Albania and Albanians, who are present here today and who have contributed and have marked the performance of our economy. I do hope that such meetings also serve as public deeds, delivering a message of gratitude for those contributions, which in a certain way have helped the Bank of Albania in organizing scientific-thinking events regarding subject matters that focus on the Albanian economy.

Dear colleagues and collaborators,

In these 13 years, Albania has been “on track” of progress. The economy is finally development-oriented. As actors of our times, we all are inclined towards the best, towards the future. Living in a society that is trying to build up a safer future; having institutions that tend to establish outstanding models; establishing a democratic popular mentality oriented towards a positive attitude of a variety of ideas, is a success for the country and for the economy. The Albanian society, state and mentality have in overall evolved simultaneously. Maybe this is related to our early tradition; maybe imposed by the challenges of our survival through the years; maybe this is related to our greatest desire to see our country and ourselves among the most developed.

One thing is for sure: that progress relies on an economy that is developing. Nevertheless, this speech does not focus on how much and in what way the Albanian economy has grown, what its directions have been and how often it has got stuck. What I would like to underline, is that the Albanian economy has recorded significant and tangible growth, evident to everyone. This growth has is becoming a strong support to our future projects and challenges. This growth strengthens the belief that all of us are trying to give ourselves and our country the best offered by the current development, and that we really do deserve more.

In order to win ever more, one should really try hard; should use efficiently what he has earned and at the end should also have the generosity to leave something to the other generations. Thus, one may ensure the development track.
We have already laid the foundations of an overall economic development. Whether this development is rapid or slow, secure or fragile, peaceful or full of wonders is another issue. What matters is the fact that we have planned for our economy an ambitious future.

Attaining this requires many efforts; requires a clear economic vision; requires courageous decision-making; requires a wide vision while treating problems and real strategies for economic development. And this is what I would most expect from this conference.

My dear friends,

We are gathered here today to speak about an argument that is not unknown to every one of us. What we are going to say, the way we are going to approach the future of our problems, and the real chances for further progress, all of these, I am sure will be useful.
Together with our co-organizers of the Economics Faculty, University of Tirana, have tried our best to achieve this.
Therefore, I would like for this Conference to further serve the mutual economic co-operation and development.
Upon concluding my speech, with the hope to have transmitted all my gratitude to your presence here, I would like to extend my very best wishes to this conference, success to the honorable speakers, and an enjoyable stay in the beautiful city of Saranda to all of us.
Thank you!

Shkëlqim Cani
Governor of Bank of Albania

Complimentary speech in the Conference

Thank you very much, Mr. Governor, Mr. Minister, dear friends, dear colleagues.

It’s great to be back and you know time goes so fast in life, it’s eight years in fact since I last visited Albania when I was responsible for the Eastern Europe and Balkan Department in the World Bank. I kept a little calendar and in three years 92 – 95, I came 28 times in Albania. That means definitely that Albania was my second home. Than different positions happen, different work and also the deep crises in Turkey; and while I thought so often of Albania, and of my friends here, of the progress the country was doing, I had not the opportunity to come. Thank you very much for inviting me, thank you for giving me this opportunity to be together with you again back in Albania.

You know, I’m going to start with a little story, because it’s good to tell a story after a nice lunch like this, and it’s professor Mema who inspired me to tell this story when we talked about mentalities and how each country has its own spirit in all that. You know I’m Turkish, but I lived outside Turkey for many years so let me tell you a small story about economic reforms when I was a minister. It has to do a little bit with mentality because I think both Albanian and Turks share a strong built character, we are not easily pushed around, we want to impose our will. So, in Turkey, one of the many reforms we tried was to liberalize Turkish Airline Industry. Turkish Airlines is a very important airline but it was making losses, and part of the reason for the losses was the low prices that the Ministry of Transport was imposing on Turkish airline. So it was important to have this big company become profitable and what I wanted to do was to liberalize the prices, but the Minister of Transport had no intention at all to cooperate with me on this matter. He was in charge for movement of prices and also for setting the time – tables, which is perfectly normal because you cannot allow the planes to take off whenever they want. So I prepared the prices liberalization law, I sent it to the Prime Ministry and after a while I got a call back from a colleague who was trying to help me. He said, let’s make a change; why don’t you add to the price liberalization also the liberalization of the departure and arrival times, let the planes leave and come whenever they want! I said ‘It’s crazy, everyone will think I’m crazy’. So, than we agreed to just send the cover memo with my name, because I was not going to sign that officially. He took it to the Minister of Transport and he said ‘Look at this stupid Dervish. He wants to liberalize the departure times, so you take the red pen and cross it out, but as far the prices are concerned, ok let him do this!!!!”

So that way we both got our will, neither one dominated the other.

Let me take this time to share with you some basic lessons that I’ve learned in my work at the World Bank, as a minister, as a professor in the universities, as an economist etc. Let me just select a few, which I think are important and worth it.

The first lesson is to recognize the development as a really integrated process. It’s not just about economics, it’s about political economy, government, about social systems; it’s really an integrated whole and it has to be looked in that way. If we see it in the narrow economic approach this leads to mistakes. This is not to say that economics is not important, it’s very important, and particularly so the macroeconomic framework. We know a lot about monetary policy, fiscal policy, as we had excellent resentations this morning. Of course we have to be a good technical economist but to succeed I think we need sociologists, historians, psychologists, social scientists and what we really need is a good political process. I think this is what history teaches us; just to be an economist is not enough and particularly all of us are economists. I think we should all remember that, otherwise we would not get the success we want.

The second major I would like to propose is particularly for transitional economies. Oscar Lange, who was a very famous Marxist economist, who also taught during the War in the university of Chicago; many of you have surely heard about it; wrote a very interesting article about the computer and market which come out at the early 50’s. There was a great misconception among Marxists in the 30’s, 40’s, 50’s and this is a very interesting article about the computer and market. It was an old debate about markets and planning and he said, “but now we have computers, so forget the market, we can write computer programs, a thousand of equations, and than we can plan correctly a socialist economy”. This was the misconception, such a very intelligent man talked about. Of course that type of quantitative planning was very old, very inefficient, very bureaucratic and could not possibly work. But the opposite extreme, which has happened in many countries, is that there is no strategic planning at all. There is a very little long-term thinking, and in fact what happens is that the annual budget has became the only economic framework that exists in many countries. I think this is also quite a mistake. I think what we need is a strategic planning framework, in fact not just economic but overall social planning, which looks at emigration, income distribution, at sources of growth, education, health, at all this things. This can help a lot to avoid a kind of crises and mistakes that we have seen in so many countries. I believe that somehow we have to rebalance a little bit, of course don’t get me wrong, I’m not at all advocating any return to old style bureaucratic planning, but I do believe that a part of the Ministry of Finance’s annual budget can be a seriously multi-year framework. It has to be looked at more seriously. I would say that in even an institutional context, such as a ministry is, a long term strategic planning is necessary. Markets are often very myopic and they also make mistakes, so what you need is to make the interaction between them and planning.

The third lesson I think we have all learned is the crucial importance of financial sector. I think that we have learned this lesson but this lesson hasn’t been learned enough in international level. I do believe that the same kind of attention that is given to the financial sector nationally, also needs to be developed at the
international level. I think Albania has not yet experienced short-term large capital flows. The kind of foreign exchange market you have in Albania probably is made by remittances. You don’t yet have somebody in Citibank or in Deutsche Bank saying ‘Ok, I’m going to buy Albanians bonds today’. This is a mixed blessing, let me tell you, because the day that the international banks attacked the Turkish lira on Feb. 19’th, The Citybank made 1 billion $ in one day, in 24 hours. Ok, their business is to make money, but try to explain this to Turkish worker who just lost his job, because of the collapse. So this kind of excessive volatility in capital flows and excessive attacks on currency are very difficult to feature. I don’t have a magic solution for it but I do believe that some supervision in that area is probably needed. I do support the IMF’s work on orderly restructuring mechanisms in the international financing system. Let me also add to this, one more point and that’s about the income distribution and poverty. When you look what happen to income distribution and poverty at time of crises, you’ll always see that there is the poorest people who take the biggest hit, the
rich somehow adjust.

The first duty of a policy maker is to avoid deep financial crises in his country; and the first duty of the international organizations is to build an international system that is not indifferent to crises, as the one we have had. Now let me say a few words about the IMF, the banking world institutions and their interaction with the countries. I’ve spent 20 years at the World Bank, I enjoyed it, it was a good period, I learned a lot and I think we did some very useful things in Albania and in other countries. So, I am a supporter of the Banking world institutions and I think the world needs them. At the same time I do believe that it’s very important that economic programs emerge out of the true interaction between the advisers from liberty unities, institutions from IMF, world bank and the local government, bureaucracy, opinion makers, civil society etc. That interaction I think is absolutely necessary to generate good policy; even the best advisers from abroad cannot really understand fully all the details of the domestic system and I think time is needed to learn this by discussion, by interaction. I believe that maybe IMF and the World Bank are trying to do this but even more effort is needed in that direction. I think there are some dangers in management practices. I mean why is it so difficult; for example when one appoints a resident representative from the World Bank or IMF; to have a planning period, when the old resident representative is still there? The new one that has been appointed comes, they work together for six – nine months and than the old one moves away. Instead I think the personal planning procedures of institutions are still inefficient. I would say, there is not enough
international planning on how this whole thing is managed and I think the country suffers from that. A good representative learns very fast, but to put somebody in the country with no experience of that country, I don’t think it’s a very good management practice.

So, I think there are things one can do; practical steps, to improve the give-and-take between the international institutions and domestic economy, whether it is Albania, Turkey or Mexico or Argentina or else.

Finally, I want to make a last point. It’s a very difficult point of course. Some problems unfortunately don’t have a national solution. I mean some problems that developing countries are facing, really have to be solved at the international level. Let me give you one example when I was running for parliament. The cotton farmers in Turkey produce good, high quality cotton and the cost of producing is quite ok. The problem is, as the most of you know, that US is offering massive subsidies to its cotton farmers. So what could we do, we have a big budget problem, a big debt problem, there is no way that Turkey or Albania or even Brazil can subsidize the domestic cotton the same way as US does. So what can we do? Put a tariff for cotton? If we do this, then our cotton becomes more expensive than the world cotton and our textile (people producing shirts) will suffer from that. So what can we do? We only can watch the cotton farmer go down and disappear because the US is offering such huge subsidies to its farmers. This is not a problem that I as a Turkish policy maker can solve in Turkey. This is something we have to solve at the international level. I know it’s a very timing thing to make this point. Those who preach free trade and competition in the world, don’t; they turn around and pass a form of bill, of the kind that the US administration has passed a few months ago, of huge additional subsidies to the American farmers, not even to the poorest American farmer, but to the rich American farmer. And so, this makes tremendous damage to poor farmers in the developing world, in Africa, Eastern Europe, in Latin America and so on. For some of this problem we really have to fight internationally and the only way we can succeed is if main countries get together, negotiate together and show their strength. Because these are real problems and it’s not true that all the mistakes made or all the cost that people in developing countries have to bear, are domestic. Some of them are really made in Washington, Brazil and Tokyo, so we should also remember that. I believe that the IMF, The World Bank should help in that direction. Mr. Olters and Mr. Passacantando, both of them have been very strong outspoken of these issues and we should be grateful for that.

So finally let me say how did I find Albania, I haven’t seen too much, but tomorrow we will see more driving back to Tirana. I think that there has been tremendous progress in Albania. The eight years is not that long period and I can see how much the country has changed. It has a tremendous development. If it hadn’t been for the financial crises of 96 – 97 I guess Albania’s per capita income would be another 500 US dollar higher. So this shows how important is to avoid crises. Many countries have run into this, people learn and sometimes these crises have one good thing also. The people learn from this mistake and don’t do this again. I’m very optimistic; I can see a lot of progress. I was always very optimistic about Albania. I knew it would be one of the start performers of transition, I think if all of you contribute, you will be proud with the achievement. I also believe that together with our European friends, both Turkey and Albania will adopt in European Union actually faster than more people think now. This will finalize the whole transition process and it will also make Europe stronger and bigger, not concentrated. If you have this conference another eight years from now, I can’t predict that you will be in the union but you will be very close to it. I do believe that Albania will catch up fast. I think that Turks and Albanians will help each other in this reach to have this friendly, peaceful South Eastern Europe.

Many, many thanks and I’m so happy to be here!

Kemal Derviš

Member of the Parliament in the Republic of Turkey

Publications on the occasion of the Conference :

Presentations and the discussions in the Conference :