PRESS RELEASE
Speech by the Governor of the Bank of Albania, Ardian Fullani at the regional meeting in Gjirokastra, 30 September 2010

Dear guests,

It is a distinct privilege for me to return to the city of Gjirokastra. Through this communication today with representatives of the business community of your district, I would like to go back to some of the considerations that relate to the growth model.

First I would like to point that my discussion won't deliberate on philosophical considerations of political economy. That is, this discussion does not intend to address theoretical theses of the kind: a market economy or a planned economy? This choice has already been made and there is no hesitation or doubt that market economy is the right alternative approach. Similarly, this discussion does not intend to deliberate on the role of the state in economy, its size, the tax system or Government spending structure.

The debate about the role of the state is naturally a highly important topic, particularly when viewed from the business cycle theory viewpoint, when we explore the philosophy, role and the extent of government intervention to correct short-term fluctuations in economy, or the reallocation of income generated by the economy.

In my addresses related to this topic I have always discussed the role of the state in economy from the long-term economic growth theory viewpoint. In practice, these models are known as: the Asian growth model, which bases on the rapid growth of exports, or the Irish growth model, which stimulates the rapid growth of technology.

In this case, the entire state superstructure is designed in a way that supports the transformation of the economy (legal, economic, production, academic and pedagogical, and foreign policy structure) in accordance with the strategic development plan. 

To better illustrate the foregoing concept, let each one of us ask himself these questions:

• What is my vision of the country's economic and financial development level in 30 years?
• What are the distinctive features of our economy during this period?
• What model will we stick to in this long process of successive changes and adjustments?
• How will the legal basis be adopted?
• Who will the change in the structure of the economy favour?
• Will scientific thought have a special role in academic life?

This is the debate we want to stir up. Acknowledging the expected developments and structural reforms in economy is a necessity for us and our policies in order for them to sustain the trends of economic development, and ultimately, ensure the country's macroeconomic and financial stability. It is hard for a single institution to formulate this strategy in a single word. Moreover, it is wrong. As I said earlier, this debate is a property of the society, which should have a proactive role in both the formulation and implementation of the strategy. I consider that, in addition to the general discussion, these are the topics our discussion on the new growth model should focus on.

Albania's economic activity in the last 20 years corresponded to a relatively long period of cooperation agreements with the IMF and the World Bank, beginning from the funding to ease the balance of payments deficit, which was followed by the stabilization and poverty reduction programmes and concluded with the more liberal agreements on commercial terms in the recent years. The low per capita income and the large imbalances we inherited set the stage for large amounts of foreign inflows to enter Albania in the form of grants or soft loans. This was also followed by the incessant increase of foreign inflows via remittances and the privatization process. Consequently, gradually with the stabilization of basic parameters, the conditions were set for a rapid increase of trade activity with the rest of the world, particularly as far as imports are concerned. The consolidation of the banking system, which has increased lending to economy markedly in the recent years, was also a major impetus. Domestic consumption has been ever-increasing. The lack of sufficient domestic production capacities has been deepening the current account continuously over the years. This was more or less the model Albania's economic development was based on in the last 20 years. It spread throughout all former communist countries in Europe and it was known as the catching-up process.

The last crisis disrupted this mechanism of financing consumption through debt. It is a fact that this crisis put an end to financial abundance and the investor's approach to accept risk. In other words, savers in advanced and emerging economies do not wish to make their funds available to consumers for the latter to increase production by purchasing houses, machinery or other consumer goods, or by going on holiday abroad.

Today, the transition of these countries from transition economies to developing economies demands further deepening of structural reforms and the implementation of new economic growth models.

We all need to understand that credit-fuelled consumption-led economic growth has had negative consequences for the economy. Current debt level accumulated under this model is relatively high. It is evident in the high trade and current account deficits that we have accumulated in the last 20 years. Albania's deficit compared to other nations shows a record high level of about 14% of GDP. In other words, we consume each year about 14% of the future GDP. Many empirical studies argue that in order to maintain the external economic balance, Albania must run a no higher than 5% current account deficit as a percentage of GDP. Endeavours to bring the current account deficit down to long-term and stable figures would subsequently improve the domestic production potential, and ultimately, the economic growth structure or model at home.

According to economic identity, a country's current account equals savings minus investments. That is, in order to bring the current account deficit down, Albania must increase national saving (or lower consumption) or reduce national investment. Maintaining high investment rates is essential as they are the basis for economic growth. Therefore, we must opt for a new growth model that keeps the level of savings in an optimal balance.

This brings us to another important argument. Financial market infrastructure and the instruments it provides still need to promote saving and finance investment. The current instruments in the form of deposits and investment in Government bonds are short-term, up to 5-year maturity. Hence, they do not encourage households to balance between present and future consumption. Unlike our economy, the structure of savings in advanced economies clearly encourages long-term investment, mainly in the form of pension funds. These types of instruments provide proper incentives to increase long-term saving. This is why I have many times been vocal about the need for a pension reform.

Economic growth theories elaborate extensively on similar topics that relate to the role of capital and other factors of production. Thus we can say the same when it comes to the unique role that land, as the major and most limited factor of production, plays. What are the obstacles that do not allow this major factor of production to produce similarly as in advanced economies or at least the regional economies? I won't elaborate on this topic, nor will I reiterate myself, considering that the use of land will also depend on the specific objectives we will set for our economy in the next 30 years.

I would like to elaborate further on the new economic growth theory. It establishes that the ability of an economy to grow is largely determined by its ability to be competitive and produce or adapt quickly and efficiently to the new production technologies.

These theories view the competitiveness of the economy in its ability to generate scientific innovation, to enhance productivity through a cheap labour force. Hence, competitiveness is not an attribute of the monetary values a country holds, but of the labour force capacity to increase labour productivity faster than labour cost. These theories corroborate the high importance of human capital and technology to economic growth. 

Refraining from determining the nature and direction that education should take in order to have a competitive labour force in the 21st century (this should be part of the foregoing debate), I would like to draw your attention and stir discussion about two key aspects: the nature of present-day education and the market instruments for intellectual property.

First, from the perspective of demand, our education-related strategies are generally based on the individual's adaptive expectations rather than on rational expectations. That is, the selection of the high school or university is past-oriented rather than future-oriented. Let us only remember that in the last 10 years, the labour market has generated jobs in the banking system, construction, or has yielded high income in the legal field. We have many lawyers, economists, construction engineers and architects. According to the latest INSTAT's figures, students' first choice branches of their university studies in 2008 were Economics (17%), Law (6.4%), Pharmacy, Construction Engineering and Political Sciences, which make up nearly 42% of graduate students. These branches have been the students' first choice, thus leading to the labour market's super saturation with similar experts. Concerning Economics-related branches, like Engineering in the branches of Mechanical Industry, Metallurgy, Mining Engineering, Industrial Chemistry, Mathematics and Physics, the number of graduate students has reduced substantially compared to 10 years ago, making up only 5% of graduate students in 2008.

One of the problems with the current economic growth model is that this group of graduates will face an economic structure that won't be able to involve these experts in the future. Despite the successful reforms in education (reflected in the number of students in the elementary and high school levels), attendance at the university level is still low, merely 28%. This figure still lags behind the countries we have to converge to, an average of over 50%, (Italy 67%, Greece 95%, Czech` Republic 50%). I do believe that the division of branches at university level should better suit the needs and aspirations of Albania's economic and social development in the future. 

A similar situation may be also seen in high school education. In the early 1990s, about 50% of high school students attended vocational schools, while in 2009, only 16% of the students developed expertise in a particular profession. This gap between the market needs and the creation of human capital, by generally gaining expertise as technicians, does not represent an optimal choice for the long-term development. It is impossible to adopt a rational approach in demand for education unless there is a discussion about the priorities and branches that need to be prioritized in the development of Albania.

The labour market data provide essential supply for a sound decision-making of monetary policy and economic policies in general.  

It should play a key role in formulating the curricula in our educational system, not only in terms of the attendance ratios (capacities), current programmes and textbooks, but also in terms of the academic staff and the base material for developing academic know-how.

How do these programmes and their attendance match with the long or short-term objectives of the Albanian business development? What is the role of the Albanian business in funding these programmes?

These are highly essential issues to be discussed in the context of the economic growth model. It is generally hard to identify in the Albanian market whether there are financial and social instruments that allow this cooperation between education and the business. We can conclude that the development of human capacities in our case is occasional and past-oriented, and it does not necessarily contribute to the future and its model. Relevant forums and institutions should be an important part of discussions about the growth model.

Intellectual property and its support mechanisms are another key element in the design of the new economic model that our academic, business and state systems should focus on. Intellectual property, acknowledged to be a key component of technological development, plays a dual role in a country's economic development. It does not only provide a strong support to economic growth, but by promoting technology, it becomes the subject of economic development itself.

Lastly, I want to comment on the global aspect of the growth model. Establishing competitive standards and products in today's world economy is part of the global game. If you look at the development plans of the surrounding regional economies, you see that they mostly resemble competition among countries rather than regional cooperation which, given the similar features of our economies, would allow for setting up a joint market. The country's new economic model should also redefine Albania's role in the region.

The Albanian economy needs restructuring in order to find its spot in global economy. This also involves its re-dimensioning in the region in order to pursue collinear economic development policies across the Balkan countries. All these issues raise a question: What are the obstacles for the Albanian economy in setting up institutions that debate over these important issues? What should we do to make them debatable? How can we encourage the establishment of these institutions and their reliability?

These are the major issues I wanted to steer the future of debate over economic growth to. The Bank of Albania surely has the reputation and the intellectual capacity to contribute to stirring up, and also discussing, this debate. In this context, we have been cooperating with the University of Oxford in London and we are open to share the fruit of this cooperation will all the stakeholders. I invite you to be part of this debate and its driving force.