Final Report - European Commission - Europa

Chapter 1 Relevance of the strategy 5
that often characterises Albanian politics. Despite efforts, there is still no modern or well-functioning
public administration. In large part this is due to a mentality which politicises everything and places
party interests ahead of the state. Effective governance depends on popular respect for government and
its mechanisms. Instead, distrust for the state and its institutions is increasing.” 11
Finally, donors themselves must take some of the blame. Before 1997, donors paid very little
attention to governance and corruption issues; assessments of development in Albania
focused on the high growth rates and were generally extremely positive. Donors –
particularly the EC - did little to try to prevent the crisis, and were very poorly prepared when
it occurred.
Moreover, recent research shows that “higher aid levels erode the quality of governance, as
measured by indexes of bureaucratic quality, corruption, and the rule of law”. 12 This effect
may operate through a number of channels in Albania, notably the large amounts of aid that is
not integrated into the government budget (which both makes budget management more
complex and may tend to encourage and/or facilitate corruption) and the large number of
semi-independent Project Management and Project Implementation Units, which may
undermine the development of more sustainable mainstream line Ministry capacity. At the
same time, public administration reform does not focus sufficiently on pay reform issues.
Economic and Social Situation
Macroeconomic situation and constraints
Albania has a population of about 3.4 million, with population growth estimated at about 1%
per year (although estimates of migration are very uncertain). At about 28,500 square
kilometres, it is comparable in size to Belgium. GDP per capita is about $1,100. The
economy is dominated by agriculture, which represents more than 50% of GDP. The heavy
manufacturing sector largely disappeared after the fall of Communism; this has to some
extent been replaced by light export-oriented manufacturing, taking advantage of Albania’s
low labour costs to subcontract for foreign manufacturers (principally Italian), especially in
the textile industry. Services are dominated by the construction industry.
Since 1998, high growth has resumed, averaging about 7% per year. Even the influx of
nearly half a million refugees during the Kosovo crisis did not derail economic stability,
thanks in large part to substantial external assistance. Growth has been driven by private
investment, especially in the construction industry, fuelled by a sharp rise in remittances.
Remittances, as well as foreign aid, also help to finance the very large trade deficit, about
20% of GDP. Over 90% of Albania’s imports are from EU countries, dominated by Italy and
Greece. The fiscal deficit, which is financed partly by foreign aid and partly by domestic
borrowing, is regarded by the IMF as sustainable.
The macroeconomic picture therefore looks relatively good: the World Bank and IMF believe
that Albania can continue to grow at 7-8% per year. However, there are a number of
potential roadblocks that could stand in the way of sustained growth:
• the quality of governance and corruption. The poor quality of public administration, and
in particular the dysfunctional nature of the legal and judicial system, is a severe deterrent
to private investment, both domestic and foreign. Corruption is widely perceived as
pervasive. The 1999 Transparency International Corruption Perception Index places
Albania (84 th out of 99 countries), only slightly ahead of Uganda and Kenya.
11
12
“Albania: The State of the Nation 2001”, International Crisis Group, May 2001.
World Bank Policy Research Working Paper no 2396, “Aid Dependence and the Quality of
Governance: A Cross-Country Empirical Analysis”, Stephen Knack, July 2000.