I first came to Albania in 1993 as part of the World Bank’s first team to assess the economy when the country emerged from its decades of political isolation. At the time, my colleagues here in Tirana would routinely wake up in the middle of the night to cook and take advantage of the only hour or two of electricity supplied each day. And I remember shivering in the Tirana Hotel with almost no heat or food.
Two weeks ago, I drove on holiday across the border from Greece into Albania. Somewhere between Korche and Pogradec in a quite remote part of the country, I stopped to ask a gas station attendant for directions. Although I was doubtful, I asked this young man for a map. He looked bewildered trying to fathom my English, and my hopes sank. Then his eyes grew wide, and he asked tentatively “Google Map?” When I said yes, he waved me over to the café next store, spread his arms and said triumphantly “Free Wifi!.”
It was an unexpected reminder of how times change, and how Albania has transformed itself from a low income country to an upper middle income country in the past twenty years. In this period, per capita income has risen from around USD 500 to 4000, and absolute poverty has declined from estimates of over half the population to around 12 percent today. We cannot forget this remarkable transition as we grapple with today’s challenges.
Today, having become a much more open and connected economy, Albania looks a little too much like the rest of Europe: weak growth, anemic recovery, high unemployment, fragile financial sector and over-extended fiscal stance. And some might argue that Albania risks falling into a classic “middle income trap”: still too poor to be a world-class innovator and service provider, but too rich for low-cost manufacturing.
These are some of the challenges that the incoming government will face. I would like to thank the Honorable Prime Minister elect, Mr. Edi Rama, for this opportunity to contribute to government’s early strategizing on how to address these challenges. I would like to suggest four priority areas where government can take specific actions in the next six to twelve months: i) Preventing crises; ii) Creating jobs; iii) Delivering services; and, iv) Protecting natural endowments.
Preventing crises. Ensuring that bad things don’t happen is always job number one for any government. Two areas will require engagement in this regard. The first is a deeply troubled power sector, where demand outstrips domestic supply, investment is negligible, distribution losses from illicit use are staggering, tariffs fail to cover current costs, collection rates are low, public arrears large and key institutions financially insolvent.
This situation cannot go on—and government needs to take immediate action to ensure adequate supply for the upcoming winter and avoid exacerbating fiscal liabilities in the sector. A lesser, but still real, concern is the financial sector, where many commendable actions have already been taken to avoid the worst fallout of the global crisis. Indeed, banks are sufficiently-capitalized and provisions are adequate, but a rapid rise in non-performing loans from five percent in 2007 to more than 25 percent needs to be reversed. This, along with high public sector borrowing, has stagnated credit to the economy since last year. Specific short-term recommendations to prevent crises are available for discussion.
In addition to preventing bad things from happening, government can begin to make some good things happen too. In terms of Creating Jobs, government can take action to improve competitiveness and the investment climate. By most measures, reform in this area has lagged—and Albania’s persistent large current account deficit and weak foreign investment rate speak to this.
Among the key priorities are property registration, construction licensing and contract enforcement. However, the most binding constraint in the longer-run doesn’t tend to be reflected in assessments of competitiveness and business climate: despite efforts to improve education quality, half of Albania’s youth are found to be functionally illiterate in standard testing—and nothing can compensate for precious human capital.
Let me move to my third suggested area: Delivering Services. By this, I am talking about revenue, expenditure and structural measures that would create the fiscal space and incentives needed to provide more and better public services to the Albanian people.
Public debt is quite high—and Government spends more on interest payments than on education for example. As the population ages, the pension system grows increasingly unsustainable, while social protection often fails to reach the poor and disabled. Many specific reforms have been proposed, but perhaps most important is to strengthen trust in public institutions more generally. Peoples’ perceptions of transparency and accountability in public institutions will largely determine how much any government can accomplish over time.
I would make a plea to put in place mechanisms for social accountability in order to hold government responsible to the electorate for the delivery of high-quality services.
Finally, my fourth point is a bedrock of long-term development: Protecting Natural Endowments. This is an issue of growing importance but also growing complexity. Albania has legacy of environmental hotspots as well as on-going deficiencies in urban, industrial and hazardous waste management which put the nation’s health and well-being at risk. I was much encouraged by a recent visit to Porto Romano, one of these hotspots, where the World Bank supported a clean-up that today allows a kindergarten and community park to flourish in a once toxic environment.
But only one-quarter of Albania’s hotspots have clean-up plans in place. Clean-up and waste management must be complemented by world-class water management to underpin two of the main drivers of Albania’s growth: hydropower and agricultural production. This challenge is complicated by climate change and increasing frequency of extreme weather events. This also exacerbates the need for disaster preparedness in a country considered among the top ten at economic risk from multiple natural hazards.
And Albania’s coastline—where I took my family this year on holiday—is simply spectacular. It is a national treasure which must be protected against degradation and over-development to fully realize Albania’s tourism potential, and as a source of national happiness. And what better goal than national happiness for a new government?
So among a myriad of issues, I suggest a focus on four broad areas: i) preventing crises in the energy and financial sectors; ii) creating jobs by improving the investment climate and skill base; iii) improving service delivery through fiscal, expenditure and structural reforms; and iv) protecting natural endowments by addressing environmental legacies and enforcing policies to safeguard the future. Specific solutions in each of these areas are at hand and ready for action.