REPORT 2019 UPDATE Nº: 147451-AL ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC A ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC 2019 UPDATE REPORT Nº: 147451-AL © 2020 International Bank for This work is a product of the staff of The The World Bank does not guarantee Reconstruction and Development / World Bank with external contributions. the accuracy of the data included in The World Bank The findings, interpretations, and this work. The boundaries, colors, conclusions expressed in this work denominations, and other information 1818 H Street NW do not necessarily reflect the views of shown on any map in this work do not Washington DC 20433 The World Bank, its Board of Executive imply any judgment on the part of The Telephone: 202-473-1000 Directors, or the governments they World Bank concerning the legal status Internet: www.worldbank.org represent. of any territory or the endorsement or acceptance of such boundaries. 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Graphic design by: Kilka Diseño Gráfico ABBREVIATIONS AND ACRONYMS ASPIRE NPL The Atlas of Social Protection - Non-Performing Loan Indicators of Resilience and Equity NRW BoA Non-Revenue Water Bank of Albania OECD BPO Organization for Economic Business process outsourcing Co-operation and Development CEFTA OSCE Central European Free Trade Area Organization for Security and Co-operation in Europe DRM Disaster Risk Management PEFA Public Expenditure and EU Financial Accountability European Union PFM FDI Public Financial Management Foreign Direct Investment PIM GDP Public Investment Management Gross Domestic Product PPP GoA Public-Private Partnership Government of Albania SCD GVC Systematic Country Diagnostic Global Value Chain SOE IFC State-owned enterprise International Finance Corporation SOGI ILO Sexual Orientation and Gender Identity International Labor Organization TAP IMF Trans-Adriatic Pipeline International Monetary Fund VAT INSTAT Value Added Tax Institute of Statistics, Republic of Albania WDI World Development Indicators LGBTI Lesbian, gay, bisexual, WTTC transgender and intersex World Travel and Tourism Council MAP REA Multi-Annual Action Plan for the Regional Economic Area MFE Ministry of Finance and Economy CURRENCY EQUIVALENTS MTBP Exchange Rate effective March 5, 2020 Mid-Term Budget Plan Currency Unit – Albanian Lek (LEK) 1.00 = US$ 0.009 NCD US$ 1.00 = LEK 109.79 Non-Communicable Disease NEET Government’s Fiscal Year Not in Employment, January 1 – December 31 Education, or Training CONTENTS LIST OF FIGURES Executive Summary . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 1: Growth decomposition by expenditure components of GDP . . . . . . . . . . . . . . 14 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Albania’s economic Figure 2: Growth decomposition using development since 2014 . . . . . . . . . . . . . . . . . . . 13 production function approach . . . . . . . . . . . . . . . . . . . 14 Three Strategic Objectives for of Albania’s Figure 3: Fiscal deficit . . . . . . . . . . . . . . . . . . . . . . . . . . 14 future transformation . . . . . . . . . . . . . . . . . . . . . 22 Figure 4: General government debt . . . . . . . . . . . . . . 14 Strategic Objective 1: Figure 5: Poverty headcount and GDP growth . . . . .19 Integrating into the global economy . . . . . . . . 24 Main challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Figure 6: Elasticity of poverty to GDP growth . . . . . 19 Opportunities for progress . . . . . . . . . . . . . . . . . 31 Figure 7: Ranking of prefectures by welfare indicator (circa 2017) . . . . . . . . . . . . . . . . . 19 Strategic Objective 2: Making local governments more effective . . . . 35 Figure 8: Vulnerability index for Main challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Albania’s municipalities (circa 2016) . . . . . . . . . . . . . . 19 Opportunities for progress . . . . . . . . . . . . . . . . . 42 Figure 9. The SCD organizing framework . . . . . . . . . 22 Strategic Objective 3: Figure 10: Country size, trade openness and Enhancing social and economic inclusion . . . 49 income relation in Europe and Central Asia . . . . . . . 25 Main challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Figure 11: Albania’s trade performance vis-a-vis Opportunities for progress . . . . . . . . . . . . . . . . . 54 Western Balkan peers (magnitude and quality) . . . . 25 Policy priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Figure 12: Backward and forward participation in GVCs . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Annex 1: Main findings and priorities identified by the first-generation Figure 13: Albania vis-a-vis peer countries SCD “Next Generation Albania” . . . . . . . . . . . . . 64 in firm-level innovation and technology Annex 2: Poverty profile . . . . . . . . . . . . . . . . . . . . 68 adoption (% firms) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Annex 3: Strategic sectors for Albania’s Figure 14: Composition of domestic supply export-oriented growth model . . . . . . . . . . . . . . 70 of agricultural products, 2013 . . . . . . . . . . . . . . . . . . . 43 Annex 4: Knowledge Gaps . . . . . . . . . . . . . . . . . . 72 Figure 15: Connectivity index and road network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Annex 5: Main macroeconomic indicators . . . . 75 Annex 6: SCD Update consultations . . . . . . . . . 77 Figure 16: Stock of emigrants by destination, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Figure 17: Population pyramid by gender, 2020-2050 . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 BENCHMARKING COVERAGE AND Figure 18: Share of Albanians saving money regularly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 COUNTRY ACRONYMS Figure 19: Share of Albanians The regional aggregates used in this report, and saving for old age . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 country acronyms are defined as follows: Figure 20: Incidence of Ndihma • Western Balkans (WB6): Albania (ALB), Bosnia Ekonomike by welfare decile . . . . . . . . . . . . . . . . . . . . 55 and Herzegovina (BiH), Kosovo (KOS), North Ma- cedonia (MKD), Montenegro (MNE), Serbia (SRB) Figure 21: Overall coverage of Ndihma Ekonomike . . . . . . . . . . . . . . . . . . . . . . . . . . 55 • European Union (EU28): Austria (AUT), Belgium (BEL), Bulgaria (BGR), Croatia (HRV), Cyprus LIST OF BOXES (CYP), Czech Republic (CZE), Denmark (DNK), Es- tonia (EST), Finland (FIN), France (FRA), Germany Box 1: Stylized facts about (DEU), Greece (GRC), Hungary (HUN), Ireland the Albanian labor market . . . . . . . . . . . . . . . . . . . . . . 17 (IRL), Italy (ITA), Latvia (LVA), Lithuania (LTU), Lu- Box 2: Outline of the IFC’s xembourg (LUX), Malta (MLT), Netherlands (NLD), Country Private Sector Diagnostic . . . . . . . . . . . . . . . 30 Poland (POL), Portugal (PRT), Romania (ROU), Slovak Republic (SVK), Slovenia (SVN), Spain Box 3: Managing the process of integrating into the global economy . . . . . . . . . . . . . . . . . . . . . . . . 31 (ESP), Sweden (SWE), United Kingdom (GBR) • Comparisons with non-EU high income econo- Box 4: Quality of life and migration in lagging regions of Albania, and the mies are done occasionally when EU data is not “100 Villages” program . . . . . . . . . . . . . . . . . . . . . . . . . 36 available or to highlight distance to frontier. Box 5: Albania has undergone a two-decade decentralization process . . . . . . . . . . . . . . . . . . . . . . . . 37 ACKNOWLEDGMENTS mauer-Klambauer, Solene Dengler, Debashree Poddar (all SCAUR), Paul Scott Prettitore (SURLN), Mariko Yamamoto (SSOGL), Dean Cira, (SURDR), Pieter Waalewijn, Patricia Lopez (SWADR), Drilona Emrullahu (all CCER2), Ana Gjokutaj (ECAEC), Evis Sulko, Elda Hafizi, Odeta Bulo, Elona Qana (EC- CAL), Orjana Ibrahimi (EECRU), Luis Alvaro San- chez, Trinidad Saavedra, Armanda Çarçani (EE- This report was prepared by a World Bank Group APV). Oscar Parlback provided editorial services. team led by Ana Maria Oviedo (Senior Economist, The work was carried out under the overall EECPV), Christoph Ungerer (Senior Economist, guidance of Linda Van Gelder (Regional Director, EECM2) and Levent Karadayi (Economist, CCER2), Western Balkans), Maryam Salim (Albania Country comprising the following team members from Manager), Wiebke Schloemer (IFC Regional Direc- across the World Bank Global Practices, IFC and tor, CEU), Thomas Lubeck (IFC Regional Manager, MIGA: Hilda Shijaku (EECM2); Karine Bachongy CEUSR), Salman Zaidi (Practice Manager, EEAPV), (CTAPU), Bonnie Ann Sirios (EEAG2), Johanna Jae- Gallina Vincelette (Practice Manager, EECM2), En- ger, Keler Gjika, Sunita Varada, Raha Shahidsaless rique Blanco (EECM2), Jamele Rigolini (HECDR), (all EECF2), Mediha Agar, Jonida Myftiu, Roberto Simon Ellis (IECDR), Gianfilippo Carboni (MIGEC), Panzardi (all EECG2), Andrei Busuioc, John Hodge and Lada Strelkova (ECCWB). (all EPSPF), Harald Jedlicka, Iva Hamel, Zenia The team thanks the SCD peer reviewers Kin- Ann Rogatschnig (all ETICI), Luis Alberto Portu- non Scott (Nicaragua Resident Representative) gal Perez (ETIRI), Flora Kelmendi (HECED), Lore- and Eduardo Olaberria (Senior Economist, ELC- na Kostallari, Adrien Dozol (HECHN), Vlad Alex- MU) for their insightful feedback. Helpful com- andru Grigora, Maddalena Honorati (all HECSP), ments and suggestions from Fernando Blanco, Ni- Jing Xiong, (IAFT2), Natalija Gelvanovska-Garcia harika Sachdeva (CCER2), Stefka Slavova (CCEF2), (IDD01), Rome Chavapricha, Gazmend Daci, An- and Stefan Agersborg (HGNDR) are also acknowl- tonio Nunez, Artan Guxho, Megersa Abate (all edged. IECE1), Alexandra Horst, (IEGSD), Christine Ma- rie Shepherd Vermeulen, Lorena Meco (all IPG- The team is also grateful to the Government PF), Ulrich Schmitt, Silvia Mauri (all SCAAG), Klas of Albania, as well as donors, academics and civ- Sanders, Drita Dade (all SCAEN), Janelle Plummer, il society representatives who participated in the Bekim Imeri, Audrey Sacks (all SCASO), Dominik SCD Update consultations and provided insightful Koehler (SSOGL), Daniel Kull, Tuo Shi, Anita Ell- comments and suggestions. 6 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 EXECUTIVE SUMMARY health measures to slow the spread of the global COVID-19 epidemic, a highly contagious virus that can cause respiratory illness in people. Measures included severe restrictions on international and domestic travel as well as the mandatory closure of public meeting places such as restaurants and schools. While the virus is yet to be contained at time of writing of this SCD update, these two crisis Since the first Systematic Country Diagnostic are expected to severely depress economic activi- (SCD) was prepared in 2015, Albania has sta- ty in Albania in 2020. bilized its macro-fiscal situation and improved As Albania overcomes these challenging GDP growth. Between 2008 and 2014, the weak- times, it will be crucial to look forward and ness in the global economic environment, par- to tackle with renewed vigor Albania’s re- ticularly among Albania’s main trade partners, form agenda ahead - the development gains caused a decline in exports, remittance inflows achieved in recent years need to be protected and external credit conditions. With fiscal vulner- and Albania’s development model needs to be abilities unraveling, the crisis lowered growth, de- upgraded to deliver faster and more inclusive stroyed jobs and increased poverty. In response, growth. Per-capita GDP is still at only around 1/3 the Government of Albania implemented a fiscal of the average EU level, and, at current growth adjustment program that brought down the bud- rates, convergence could take more than one get deficit (reaching 1.8 percent of GDP by 2018) generation.1 Indeed, in 2017, close to 4 in 10 Alba- and the economy gradually recovered: job cre- nians still lived with less than US$5.5 per day, a ation, investment, and exports increased, and poverty rate similar to the one in 2008. As Albania poverty fell by 2.3 percentage points (in 2014- moves closer to commencing formal negotiations 2017), while GDP grew on average by 3.2 percent toward European Union membership, it needs to per year. Structural reforms in some areas have take advantage of the reform incentives that this also moved forward, including in justice, energy, process offers to create more favorable conditions and territorial administration. for faster, inclusive and sustainable economic In late 2019 and the first half of 2020, Albania progress to its citizens. was struck first by a historic earthquake and The SCD Update aims to identify Albania’s then by the global COVID-19 pandemic. In No- binding constraints for faster progress against vember 2019, Albania was struck by a 6.4-mangni- the current political backdrop and on-going tude earthquake, killing 51 and displacing 17,000 trends. The Update takes the analysis of the origi- people. As Albanians started the reconstruction nal 2015 SCD as a baseline and reviews the progress process, supported by a pledged EUR1.15 billion and outstanding issues in light of recent evidence financial assistance package from the internation- (including WBG-led analyses on productivity, fi- al community, a second crisis hit. In March 2020, nance, labor markets, gender, urban development, Albania was forced to take unprecedented public agriculture, fiscal policy and others). It then ana- 1 Assuming that Albanian and EU GDP per capita (PPP 2011 international $) continue to grow at their average rate over the period 2008-18, GDP per capita would equalize in 2071. EXECUTIVE SUMMARY 7 lyzes how further progress can be achieved, using cess have been modest so far and Albanians still the EU accession process as an anchor for reform face significant spatial inequality in access to jobs and considering three important trends in the and services, while the major cities continue to country: the shift towards the global economy, face unplanned growth and congestion. Further, which needs to be reinforced to produce higher while rising environmental risks are jeopardizing quality jobs; the on-going decentralization process, the development of key economic sectors such as which calls for higher local government capacity agriculture, fisheries and tourism, local govern- to reduce spatial inequality; and the changing so- ments have limited capacity to manage natural cial contract and falling working-age population, resources effectively and to implement coordi- which highlights the importance of inclusive poli- nated urban and territorial development plans. cies to expand access to economic opportunities. The decentralization of disaster risk management The Update organizes the analysis around three also complicates the application of prepared- Strategic Objectives and identifies corresponding ness and response plans to address the risk of priority policy areas to achieve sustained progress. disasters such as the earthquakes of 2019. Local Strategic Objective 1: Integrating into the government strengthening is key to increase the global economy. Albania’s economic progress competitiveness of urban centers while improving continues to rest on a vulnerable model, as do- service delivery in rural areas to foster more inclu- mestic consumption, hydroelectric production, sive growth. textile and garment exports, and FDI concentrat- Strategic Objective 3: Enhancing social and ed in large energy-related projects have driven economic inclusion. Following the crisis, pover- most GDP growth since 2014. Job creation took ty reduction has been modest relative to the pre- place mainly in low-wage sectors, and real wag- 2008 period, due to modest wage gains—Albania es grew three times more slowly than pre-2008. still has the lowest average wages in the Western Subsistence and small-scale agriculture contin- Balkans, in purchasing power parity. Human cap- ue to employ the largest share of the workforce ital gaps exclude a large share of the workforce (38 percent); and labor force participation has in- from formal jobs, resulting in low wages and no creased modestly, both for women and men. Given social security, while safety nets have limited Albania’s small domestic economy, accelerating the coverage and generosity. Women and minority country’s integration into GVCs is a pathway to sus- groups continue to face barriers to job opportu- tained growth and formal job creation, through ac- nities and equal wages. The lack of good jobs pre- cess to larger and more affluent markets, a greater vents workers from accumulating savings, while talent pool, financing opportunities, new technol- the population is aging. Higher and more efficient ogies and more sophisticated production inputs. spending in health and education, combined with Strategic Objective 2: Making local govern- targeted activation services would increase access ments more effective. In 2014 Albania embarked to formal employment, while better targeted safety on a major local government reform to increase nets would better protect the poorest. municipalities’ administrative, regulatory and To achieve these Strategic Objectives, Al- service competencies and financial autonomy, bania needs to prioritize policies around 5 key while reorganizing them into fewer units to cre- areas. The Update analyzes the main constraints ate economies of scale. The results of this pro- that Albania faces to achieve the three Strategic 8 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 Objectives described above, based on the most Albania needs to continue investing in transport recent evidence available, on internal and exter- infrastructure (maintenance especially) and digi- nal consultations, and in alignment with the EU tal connectivity to increase the flow of goods, peo- accession process. These constraints span across ple and information within and across borders. At all sectors and levels of government, and thus the same time, the annual losses in infrastructure isolated efforts to address them would not be from recurring floods and the losses caused by sufficient. The five policy areas tackle constraints earthquakes such as those of 2019 compel to pri- to growth and inclusion; while the first three are oritize disaster resilient infrastructure investment. critical to increase competitiveness both for firms To minimize energy security and financial risks, and workers, the last two would contribute the Albania needs to continue upgrading electricity in- most to increasing inclusion. frastructure to reduce distribution losses, diversify Fostering competitive markets. Lowering the energy base towards solar and gas and expand non-tariff barriers, fighting corruption, reducing financial buffers in the hydropower sector. legal uncertainty, curtailing the informal sec- Strengthening the capacity of local govern- tor and increasing managerial know-how would ment to raise revenues and deliver services. To boost the competitiveness that Albanian busi- reduce spatial inequality of services and opportu- nesses need to participate in Global Value Chains nities it is critical to enhance the capacity of the (GVCs) and to strengthen backward linkages to local governments at all levels, including their ac- domestic producers. A more skilled workforce, countability towards communities. Greater taxa- a high-quality infrastructure, and a deeper and tion powers, transfers from the center conditional more diversified financial sector are needed so on results, inter-municipal coordination, and an that firms can embark in higher value-added in- adjustment of the competencies to local resourc- dustries. Innovation and digitalization initiatives es and capacity would help to strengthen local can help firms become more efficient and pro- service delivery. Better coordination between na- mote business models that integrate better with tional and local governments is critical to imple- GVCs. ment territorial development policies that sup- Enhancing efficient investment in human cap- port growth of dynamic and connected cities and ital. Starting with early childhood and throughout more productive rural areas. In some rural areas, the life cycle, investment in human capital needs targeted policies can help develop agrobusiness, to be higher and more efficient. In education, high- fishing, or tourism, while other areas need to en- er investment in teacher training and assessment sure basic needs are covered and facilitate mobil- is a priority, together with output-based financing; ity by investing in human capital. and health services need to rely more on day and Strengthening the redistributive efficiency of outpatient care, while implementing the hospital the state. Albania needs to strengthen an inclu- master plan. Increased attention in human re- sive growth model. The integration of social assis- sources in areas where shortages are more severe tance and labor intermediation services is crucial is also a priority. to ensure that vulnerable people have greater ac- Upgrading infrastructure, improving disaster cess to income opportunities to boost them into resilience and energy diversification. To acceler- the middle class and ensure better protection ate its progress towards meeting EU standards, later in life. A smoother transition from school to EXECUTIVE SUMMARY 9 work would help young people reduce the risks of reform process and land administration reform, unemployment and inactivity. Finally, reducing and reinforcing the fight against corruption and informality by increasing tax compliance is the organized crime. Second, achieving a stable mac- only sustainable way to ensure a more equitable roeconomic environment, to preserve the gains society, but this can only happen if the taxation in fiscal sustainability of the last 5 years and in- and redistribution systems are transparent and vest more resources to raise competitiveness and accountable. inclusion, while managing future risks. Third, strengthening protection of natural resources to Finally, Albania also needs to continue im- support the development of key sectors and in- proving the pre-conditions and the sustain- crease resilience to climate change, by improving ability of economic and social gains in three the quality and enforcement of regulations, and broad areas. First, strengthening rules-based the national-local coordination, in accordance government, including the process of profession- with the EU acquis. alization of civil service; advancing the justice 10 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 INTRODUCTION ond, Albania under-utilizes its physical and hu- man assets. Physical capital investment (private and public) did not prioritize high-return invest- ment and returns have been falling. The coun- try’s land resources are under-utilized because of insecurity of property rights which leads to farm fragmentation and uncontrolled growth of urban settlements. The labor market remained Having reached middle-income status over a structurally weak, with low labor force partici- decade ago, Albania now needs to accelerate pation and employment rates, significant infor- progress to boost shared prosperity and attain mality and outmigration, despite a large share of the country’s aspirations. Having emerged in working age adults in the population and strong the early 1990s from a 50-year authoritarian, iso- growth in the early 2000s. Third, low institutional lationist regime as the poorest country in Europe, quality, reflected in an ineffective judicial system Albania is today a middle-income country and at and an inconsistent application of the rule of law, the cusp of starting formal negotiations for mem- an unreliable energy supply, and a limited safety bership in the European Union–a remarkable net system create distortions in the allocation of achievement. Yet, Albania’s emergence has also resources and the productive use of Albania’s en- been marked by a series of setbacks – including dowments. Fourth, Albania is highly exposed to a macro-fiscal crisis in 2008-14. Today, Albania’s several risks: the close links between Albania and economy has re-emerged and is in recovery, but some European economies can generate signifi- the pace of development lags behind Albania’s cant changes in demand for Albanian exports and aspirations. Progress towards the Twin Goals and workers; the degradation of Albania’s natural re- convergence to EU-living standards need to accel- sources jeopardizes competitiveness and the live- erate. At current GDP growth rates, a child born in lihoods of people in sectors such as agriculture Albania today would be more than 50 years-old by and others; and systemic exclusion undermines the time the country reaches the living standards social progress by reducing gains from growth for of the EU.2 Albania needs faster, more inclusive some groups and eroding trust in institutions.3 and more sustainable growth. The SCD Update revisits the constraints The 2015 Systematic Country Diagnostic identified in the SCD and provides a fresh per- (SCD) identified four major constraints for Al- spective on policy priorities in light of recent bania to achieve the Twin Goals and converge evidence and developments in the country. to EU living standards. First, the domestic-ori- While the SCD was built upon a broad evidence ented-growth model supported by foreign flows base, it identified key knowledge gaps, especial- financing consumption and investment does ly regarding labor markets.4 The Update incorpo- not generate high and sustained growth. Sec- rates recent analytical work done in the country, 2 Assuming that Albanian and EU GDP per capita (PPP 2011 international $) continue to grow at their average rate over the period 2008-18, GDP per capita would equalize in 2071. 3 A detailed summary of the 2015 SCD is provided in Annex 1: Main findings and priorities identified by the first-generation SCD “Next Gen- eration Albania” (World Bank, 2015). 4 See Annex 4: Knowledge Gaps. INTRODUCTION 11 including WBG-led analyses on productivity, fi- population, which highlights the importance of nance, labor markets, gender, urban develop- inclusive policies to expand access to economic ment, agriculture, fiscal policy and others. It then opportunities. In addition, the SCD Update revisits analyzes how further progress can be achieved, progress in key cross-cutting areas that constitute using the EU accession process as an anchor for pre-conditions for development: economic sta- reform and considering three important trends in bility, institutional quality, and sustainable man- the country: 1) the shift towards the global econo- agement of natural resources. The Update does my, which needs to be reinforced to produce high- not intend to deliver an exhaustive analysis at the er quality jobs; 2) the on-going decentralization sectoral level, as did the first-generation SCD, and process, which calls for higher local government instead discusses key sectoral issues, referring the capacity to reduce spatial inequality; and 3) the interested reader to the relevant sectoral analyti- changing social contract and falling working-age cal work for details. 12 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 ALBANIA’S ECONOMIC DEVELOPMENT SINCE 2014 large foreign-financed projects, the Trans-Adriatic Pipeline (TAP) and the Devoll hydropower plant. Exports grew especially in textiles, leather and ap- parel, minerals, and tourism. From the production side, labor and capital accumulation contributed the most to growth, and to a lesser extent a recov- ery in total factor productivity (Figure 2). Albania’s economy continued to open to in- At conception of the SCD in 2014, Albania faced ternational trade and investment, but exports a prolonged macroeconomic crisis. Between and FDI remained narrow. Albania has commit- 2008 and 2014, the global financial crisis and a ted over the years to take part in global trade. sharp deterioration in the external environment Today, in addition to being an EU accession can- weighed on Albania’s exports, remittance inflows didate, Albania is member of the World Trade Or- and external credit conditions. This dampened ganization (WTO) and the Central European Free domestic demand and GDP growth fell to an av- Trade Area (CEFTA), signed an agreement with erage of 2.4 percent a year. While not technically the European Free Trade Association, and partic- a recession, headline GDP figures masked the ex- ipates in the Multi-Annual Action Plan for the Re- tent to which Albanians were affected by the cri- gional Economic Area (MAP REA) for the Western sis. Between 2010 and 2014, net employment fell Balkans. Between 1992 and 2014 exports of goods by about 22 thousand jobs, as key job-creating and services grew from 12.5 to 28.2 percent of sectors such as construction declined. Unemploy- GDP, while the net inflow of foreign direct invest- ment reached 17.5 percent of the labor force in ment (FDI) went from 3.1 to 8.7 percent of GDP, 2014, and youth unemployment reached 39 per- showing a significant increase in economic ex- cent. Poverty (as measured at US$5.5 per day in change between Albania and the rest of the world. PPP) increased to 39.3 percent by 2012. Non-per- The positive trend was less pronounced thereaf- forming loans (NPLs) peaked at 25 percent of the ter, and by 2018, exports reached 31.7 percent loan portfolio in 2014. As Albania resorted to fiscal while FDI remained at 8.0 percent of GDP. Despite policy to support demand, while public revenues their significance in economic activity, Albanian weakened, the fiscal deficit increased above 5 per- exports continue to be unsophisticated and limit- cent of GDP. Public and publicly guaranteed debt ed to few products and destinations, while FDI re- rose to above 70 percent of GDP. In 2014, Albania mains highly concentrated in a few large projects. entered into a three-year IMF program, a series of The fiscal deficit has been contained in the development policy financing operations with the period 2014-18, but public debt and the current World Bank and EU support programs. account deficit remained high. The government I n the period 2014-18, annual economic began a fiscal consolidation program in 2014, sup- growth gradually recovered and accelerated to ported by the IMF, the World Bank, and other part- over 4 percent. The growth recovery since 2014 ners, which introduced measures to improve tax was driven by domestic consumption fueled by re- collection, reduce the fiscal burden of pensions newed job creation, improvements in credit con- and energy subsidies, and clear outstanding ar- ditions and the inflow of remittances (Figure 1). rears. This effort and the economic recovery led Investment also picked up, in part thanks to two ALBANIA’S ECONOMIC DEVELOPMENT SINCE 2014 13 FIGURE 1 FIGURE 2 Growth decomposition by expenditure Growth decomposition using production components of GDP function approach Source: WB calculations based on INSTAT data Source: WB calculations based on WB WDI Database 5 100% 4 80% Share of Real GDP Growth 3 67 66 46 60% 2 96 1 40% 9 56 8 0 20% 15 115 27 -1 11 25 0% -2 -3 -28 -94 -3 -20% -17 -4 -40% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2000-2017 2000-2007 2008-2013 2014-2017 Consumption Investment Capital Stock ( * gK) Total Factor Net exports Real GDP growth (%) Labor ((1- ) * gL*) Productivity (gA) Human Capital per Labor Total Period ((1- ) * gh*) FIGURE 3 FIGURE 4 Fiscal deficit General government debt Source: IMF WEO April 2019 Source: IMF WEO April 2019 0 80 -2 75 -4 70 -6 65 % of GDP -8 60 % GDP -10 -12 55 -14 50 2010 2011 2012 2013 2014 2015 2016 2017 2018 45 Current account balance 40 General Government net lending 2010 2011 2012 2013 2014 2015 2016 2017 2018 14 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 to a steady decline in the deficit from 5.9 percent tic demand. Second, deteriorating global econom- of GDP in 2014 to 1.8 percent in 2018 (Figure 3). ic conditions reduced net exports and external fi- Public debt is on a declining path, in line with nancing. Third, the gradual completion of the TAP Albania’s fiscal rule, but the stock remains high and Devoll construction projects depressed do- at 69.6 percent of GDP (Figure 4) as of end-2018 mestic demand. Fourth, continued domestic polit- (compared to a Wester Balkan average of 50.2 ical tensions increased uncertainty and diminished percent), which is concerning given a weak public confidence among businesses and households. revenue base at 27.6 percent of GDP (compared Finally, the devastating earthquake on November to a WB6 average of 35.3 percent) and significant 26th caused significant damages and losses and is spending needs to close gaps in the social budget estimated to have reduced GDP growth from 2.9 to and infrastructure.5 Meanwhile, the trade balance 2.4 percent in 2019. improved, supported by growth in tourism and At time of completion of this Update in 2020, business process outsourcing, and the current ac- Albania’s economy has been severely affected count deficit narrowed from 10.8 to 6.9 percent of by the global COVID-19 pandemic – plunging GDP (expected for 2019), thanks also to continued the economy into crisis. To contain the spread strong remittance inflows from Albania’s diaspo- of the virus, Albania has ordered the temporary ra. The large and persistent current account defi- lockdown of key economic sectors (such as restau- cit implies that the country will continue to rely on rants, theaters and non-essential trade), limited substantial FDI. Foreign-exchange reserves have the movement of people outside their residence remained stable over the past two years, covering to 6 hours per day as well as severely restricting over 6 months of imports of goods and services, domestic and international travel. Even during the thus helping to mitigate risks posed by the high permitted hours, consumers and workers are stay- level of external debt of 62.1 percent of GDP (of ing at home to take care of their family – including which 32.8 percent of GDP is public external debt). their children, since schools have closed – and to Albania’s banks are liquid and well-capitalized avoid contamination with the virus. Many indus- and non-performing loans (NPLs) declined steadi- tries – even if still permitted to operate - have been ly from 25 percent in September 2014 to 11.1 per- forced to restrict business (including textiles, min- cent in December 2018.6 However, they are still ing, call centers and construction) to comply with the highest in the region, encumbering bank bal- social distancing requirements and travel restric- ance sheets and contributing to a reluctance to tions. While some businesses are experimenting lend, particularly to the corporate sector. with remote work, productivity is likely reduced. A slowdown of growth in 2019 highlights the Given unprecedented disruptions and uncertainty, continued vulnerability of the Albanian growth non-essential spending by households and busi- model. Several internal and external factors ex- nesses is delayed. Export orders are collapsing in plain the fall in growth in 2019. First, as domestic the face of severe economic dislocations in key electricity production relies mostly on hydro pow- trading partners, including Italy. It is looking more er, a drop in rainfall slashed electricity production and more likely that Albania will face an exception- and forced an increase in imports to meet domes- ally poor summer tourism season. 5 World Bank, Western Balkans Regular Economic Report: Fall 2019 (2019). 6 The capital adequacy ratio was above 18 percent in December 2018. ALBANIA’S ECONOMIC DEVELOPMENT SINCE 2014 15 The Government is rolling out a series of eco- model to deliver faster and more inclusive nomic support measures to help Albania weath- growth. A consumption-driven growth fostered er this crisis – the fiscal stance will drastically the expansion of non-traded sectors and low- loosen in 2020. While a rebound of economic skilled employment. FDI in energy infrastructure activity is expected once the impact of the virus and rain-fueled electricity exports boosted GDP can be contained over the coming months, the in- growth but none significantly increased quality job tervening economic disruption is likely to put se- creation across sectors, and FDI has not strength- vere stress on many Albanians. Many households ened value chains connecting to regional and glob- will face economic hardship, as (i) jobs will be al markets. Gross fixed capital formation remained destroyed and (ii) some income earners will need at around 24 percent of GDP throughout the period to stay at home to take care of immediate family 2014-18. International trade in goods and services members, to stay in quarantine or to treat their has grown but it trails Albania’s peers and has not own illness. To the extent that the crisis forces fun- led structural transformation. While key industries damentally viable businesses to shut down, rup- for future growth in Albania, such as tourism and ture productive supply-chain relationships or let business process outsourcing have grown recent- go of employees that have built up significant on- ly, the structure of employment across sectors the-job knowhow, the shock can leave permanent has changed slowly in favor of manufacturing and economic scars. Banks enter the crisis with strong services, and agriculture still employed around 38 capital and liquidity buffers - but they will face ad- percent of the workforce in 2019. Meanwhile, the versity as their loans are not repaid according to private sector ecosystem consists of mostly small schedule and their future business prospects di- firms that invest little in technology adoption and minish sharply. A strong policy support package process innovation, face a shortage of skills (espe- is therefore needed to help the economy weather cially managerial) and compete in a market with the crisis. While measures will evolve dynamically high informality, all of which diminish their growth as the crisis progresses, it can be expected that the potential.7 The low productivity of the agricultural support policies – combined with a sharp econom- sector also contributes to spatial disparities in liv- ic slowdown – will drastically widen the 2020 fis- ing standards and pushes people to migrate from cal deficit and increase public debt. Key measures rural areas, increasing urban congestion. include a credit guarantee fund to ensure lending Despite significant job creation between to businesses that need to meet payroll as well as 2014 and 2019, the quality of jobs remains low. an increase in social transfers. Monetary policy is After 2013, employment creation accelerated (Box easing, offering unlimited liquidity to the banking 1). By 2018, employment had increased by rough- sector and further lowering the policy rate, will fur- ly 221 thousand jobs, and by 2019 unemployment ther support the economy. reached a low of 11.4 percent and youth unem- To overcome these challenging times, it is ployment fell to 21.5 percent. Of the total jobs crucial to tackle with renewed vigor Albania’s added within the period, about 60 percent went reform agenda ahead – protecting recent devel- to male workers, almost all to workers aged 25-54 opment gains and adjusting the development years and equally split among education levels. 7 One indicator of inefficiency among firms is productivity dispersion. In Albania, a firm in the top decile of productivity is close to four times as productive as a firm in the bottom decile, a difference twice as large as in advanced economies like the United States (Davies, 2019). 16 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 BOX 1: Stylized facts about the Albanian labor market Sources: Honorati, Johansson De Silva, Kupets, & Berger (2018) Ungerer & Shijaku (2018); INSTAT and EUROSTAT. Albania’s employment rate still lags EU countries. Around 66 percent of working-age adults (20-64 years) are employed in Albania (2018), compared to 73.2 percent in the EU-28; and the gender employment gap is 16.5 percentage points (vs. 11.6 in the EU-28). Albania’s high NEET rate of 27 percent and a comparatively low rate of employment for the high-skilled segment of the labor force suggests that there are significant skill mismatches in the market. At around 11.5 percent of the labor force in 2019, unemployment remains high by European standards. Nevertheless, only half of the unemployed seek employment through state mediation services. Poorly paid and informal jobs are widespread. The average remuneration rate of Albanian workers is the lowest among all Western Balkan countries (in PPP). Over 30 percent of jobs are informal. The share of part-time jobs and self-employed is the highest in the region. Low-productivity agriculture absorbs close to 40 percent of total employment, while manufacturing and services are underdeveloped. Close to 221 thousand new jobs were created between 2013 and 2018, driven by Albania’s labor-intensive growth in textiles, tourism, other trade services, health and administrative services. However, employment growth slowed since 2017. Large firms contributed with 75 percent of net job creation in the post-crisis period. This shift toward larger firms is consistent with a significant increase in the share of medium and large firms among new entrants. Sixty percent of the average net jobs are in Tirana region. Large scale emigration continues to be the most evident symptom of a lack of good jobs. High levels of unemployment and under-employment, low wages, limited social protection and low provision of social services constitute the main motives for emigration. One-third of all jobs went to women aged 25-54 The pace of inclusion stalled following the years, with a larger share for more educated wom- recovery from the crisis, marking a break with en. At the same time, most of the job creation was the pre-crisis inclusive growth period. During concentrated in sectors with lower-than-average the early 2000s, Albania experienced significant wages such as manufacturing, trade, transport poverty reduction together with robust and inclu- and agriculture (although the health sector, which sive economic growth (about 6 percent per year in typically has higher wages, also grew). Indeed, real terms). Poverty—measured as consumption real wage growth was much lower after 2014 than per-capita below the upper-middle-income pov- it was before the crisis: before 2008, real wages erty line of US$5.5 per day 2011 PPP—decreased increased by close to 10 percent per year (faster by 18 percentage points between 2002 and 2008, than productivity), whereas between 2014 and a drop of 34 percent relative to 2002 (Figure 5). 2018 real wages only increased by around 2 per- During this period, economic growth benefited cent per year.8 disproportionately the bottom 40 percent of the income distribution, who experienced faster than 8 World Bank (2015) and World Bank & WiiV, SEE Jobs Gateway Database (2020). ALBANIA’S ECONOMIC DEVELOPMENT SINCE 2014 17 average consumption growth, thanks mostly to pre-crisis level: in fact, the mean consumption of wages increases. However, between 2014 and the poorest 40 percent averaged 2.44 percent an- 2017, the poverty headcount dropped by 2.3 per- nually, while it grew by 0.7 percent per annum for centage points, with more than 90 percent of the the total population. Early projections of poverty change occurring between 2014 and 2015. Since following the earthquake and the Covid-19 pan- 2015, poverty stagnated (it fell by 0.2 percent- demic suggest that poverty will continue to hover age points between 2015 and 2017) and by 2017, around 40 percent in 2020, essentially wiping out close to 4 in 10 Albanians still lived with less than any poverty reduction from recent growth years. US$5.5 per day. Indeed, by 2017 the poverty rate The decentralization of government func- was still above the 2008 level.9,10 tions accelerated after 2014, but regional dis- Poverty reduction was somewhat less re- parities in economic activity and living stan- sponsive to economic growth between 2014 dards persist. Advancing Albania’s on-going and 2017, compared to the pre-crisis period, decentralization process, major reforms took and poverty is projected to have increased since place in 2015 and 2017, as the number of munic- then. Between 2002 and 2008, an increase of one ipalities was consolidated from 373 to 61, and a percent in GDP was associated with a reduction in roadmap for local governments’ fiscal autonomy poverty of 1.2 percent. After 2014, the elasticity of and discipline was established. Still, this reform poverty-growth fell and a one- percent increase has not resolved significant overlaps in functions in GDP resulted only in a 0.8 percent poverty re- between the national and local levels and an un- duction (Figure 6). Shared prosperity was slightly clear division of responsibilities that increases higher during the pre-crisis period: between 2005 uncertainty; while low local government capacity and 2008, the bottom 40 percent experienced an constrains service delivery. As a result, poverty annual growth in mean consumption of 2.64 per- and economic development continue to have a cent, above the average for the total population strong geographic dimension. The wide disper- (1.25 percent). The contraction of the economy sion of poverty rates across prefectures (e.g., Ti- between 2008 and 2012 hit the bottom 40 percent rana has less than half of the poverty headcount hard and their average consumption fell by 1.2 as Diber) is correlated with the dispersion in GDP percent. Between 2014 and 2017, positive growth per capita, housing conditions, and the number in the mean consumption of the bottom 40 was of families receiving social assistance (Figure 7).11 observed again, although slightly below the Generally speaking, prefectures along the Coast 9 Annex 2: Poverty profile. 10 Poverty estimates before and after 2012 should be compared with caution due to the change in the survey instrument used to measure households’ living standards. From 2002 to 2012, poverty estimates in Albania relied on the Living Standard Measurement Survey (LSMS). The World Bank estimated (unofficial) poverty rates using the Household Budget Survey (HBS), which is conducted on a yearly basis since 2014 and was sporadically collected in earlier years. Even though both surveys provide consumption-based poverty estimates, they present important differences that limit their comparability, including sampling frame design, purpose of the survey, structure of the questionnaire, reference period of consumption goods, regional and temporal deflators, and treatment of missing values, among others. All these differences limit the analysis of the welfare aggregate across surveys, and the conclusions about possible changes in poverty levels between 2012 and 2014. The welfare aggregate calculated based on the Household Budget Survey of 2008 is not strictly compara- ble to the aggregate in 2014-2017 as it does not contain the same consumption items. Still, the poverty headcounts with the HBS 2008 and the LSMS 2008 are similar in magnitude (about 3.5 pp difference). 11 Data limitations prevent comparisons at the municipal level of living standards and economic indicators. To fill this gap, a mapping exer- cise was done for the SCD Update using publicly available satellite data to capture outcome variations across municipalities (World Bank, Albania Vulnerability Index, unpublished, 2019). 18 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 FIGURE 5: FIGURE 6: Poverty headcount and GDP growth Elasticity of poverty to GDP growth Note: HBS based poverty measures are not officially reported Note: Annualized elasticity. Source: Authors with WDI, ECAPOV by INSTAT. Source: Authors with WDI, ECAPOV and HBS data and HBS data, various years 60 8 SRB (2013 -2016) 7 Percentage of population Real GDP growth rate (%) 50 6 MKD (2011 -2015) 40 5 KSV (2014 -2017) 30 4 3 ALB (2002 -2005) 20 2 10 ALB (2005 -2008) 1 0 0 ALB (2014 -2017) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 SRB (2012 -2015) Poverty ($5.5, LSMS) Poverty ($5.5, HBS) -5,00 -4,00 -3,00 -2,00 -1,00 0,00 1,00 Real GDP growth (%), right FIGURE 7: FIGURE 8: Ranking of prefectures by welfare indicator Vulnerability index for Albania’s municipalities (circa 2017) (circa 2016) The rank is 1 for the best-performing prefecture. The vulnerability index combines exposure to natural hazards Source: Authors with data from INSTAT and World Bank, Albania and economic capacity to adapt and respond to shocks. For - Location specific notes, Western Balkans Urbanization Review Albania Vulnerability = Exposure - Economic activity -Con- (2019) nectivity. Rescaled value: a higher value represents higher vulnerability. Source: World Bank, Albania Vulnerability Index, unpublished (2019) 12 11 10 7 12 4 5 8 8 62 10 11 1 3 12 9 6 4 11 9 5 9 9 6 12 10 7 7 2 8 2 5 12 11 9 2 3 1 10 8 5 7 8 1 4 3 10 11 6 4 3 1 5 11 12 7 4 2 9 10 6 3 7 8 5 6 3 4 1 1 2 Tirane Berat Korce Gjirokaster Durres Lezhe Vlore Fier Shkoder Kukes Elbasan Dibier Poverty GDP pc Employment rate Social assistance coverage Infant mort. Toilet in house ALBANIA’S ECONOMIC DEVELOPMENT SINCE 2014 19 and South tend to be richer, have better living ever, fundamentals are still weak: there are only conditions and are less vulnerable to shocks than 12 judges per 100,000 hab. (compared to 21 in EU) Central and Northern (Mountain) prefectures and court infrastructure is poor. There is a high (Figure 8). For instance, Tirana, Fier and Durres perception of corruption in Albania, associated accounted for over 60 percent of total GDP in with weak and politicized state institutions and 2017 and most active enterprises are concentrat- poorly functioning checks and balances. Between ed there.12 On the other hand, these prefectures 2017 and 2019, Albania lost 15 positions in Trans- also tend to have lower employment rates, which parency International’s Corruption Perception In- reflects in part the fact that many families in the dex, falling in 2019 to 109th place of 180 countries.15 poorer prefectures are older (and thus out of the Prosecution and conviction of high-level officials labor force), or perform unpaid work.13 House- has been dragging. Supervision over state-owned hold-level regression analysis of the probability of enterprises is limited. At the same time, political being poor in 2017 shows a significant structural polarization has been growing. The Albanian par- poverty component in Diber, Elbasan, Gjirokaster liament has not been able to function properly as and Vlore (controlling for household demograph- a consensus builder and representative body, fur- ic and economic characteristics). After controlling ther undermining the already low trust in public for the prefecture, the variables most significantly institutions. Civil society advocacy and financial correlated with poverty are household head’s ed- viability have been improved, but there is high ucation, household size, dependency ratio, and dependency on international donors and lack of the share of employed working-age adults. accessible public funds.16 The EU accession process has increased in- Albania has made efforts to ensure consis- centives to improve the rule of law, but percep- tent and accountable policy-making and ad- tion of corruption remains prevalent, and trust ministration systems, but implementation re- is low. As part of its commitment to EU accession, mains limited. Examples of legal reforms include Albania has made notable progress in implement- the Public Financial Management reform strategy ing reforms to comply with the EU’s standards and 2014-2020, the revised Organic Budget Law, and rules in more than 30 different areas, but more ef- others. There has been some implementation forts need to be made in particular on chapters 23 progress, for instance, PFM monitoring, increased and 24 (Rule of Law and Fundamental Rights).14 clearance of arrears, etc. Still, policy fragmenta- Recent vetting of judges has been positive, how- tion at all levels of government, managerial focus 12 Tirana accounts for over 40 percent, and its share has been growing, in contrast to the shares of Durres and Fier. (INSTAT, Llogarite Rajo- nale ne Shqiperi Databaza Statistikore, 2019). 13 While all prefectures have employment rates below the EU average (73 percent for the group 20-64), there is a 17 percentage-point gap between the prefecture with the highest employment rate (Korce, 62 percent) and the lowest (Lezhe, 45 percent). Durres, Lezhe and Tirana have employment rates below 50 percent. 14 Progress towards meeting the EU acquis has been slower in Albania than in the other three Western Balkan candidate countries (Serbia, Montenegro and North Macedonia), especially in the fundamental areas of Rule of Law, and Economic Development and competitive- ness, but also in non-fundamental areas such as Consumer and Health protection or Science and Research, where North Macedonia has progressed faster. 15 According to Freedom House, there are no “Full Democracies” that score below 50 on the CPI. Albania scores 36, corresponding to a “Hybrid Regime”. See also the Country Private Sector Diagnostics (International Financial Corporation, 2020 (forthcoming)). 16 United States Agency for International Development (USAID); Bureau for Democracy, Conflict and Humanitarian Assistance; Center of Excellence on Democracy, Human Rights and Governance; FHI 360; International Center for Not-for-Profit Law (ICNL) (2019) 20 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 on processes rather than the achievement of re- rural areas; and shifting inclusion policies so they sults, and the lack of delegation of responsibility address the needs of the most vulnerable, by gen- to middle management are some challenges that erating more resources to deliver better services prevent a more significant change in the efficiency for all Albanians. Climate change represents an and transparency of the government. E-services important threat to these resources, as floods and are growing but not fully developed. The reorga- periods of intense heat are likely to become more nization of various ministries has put further pres- frequent and extreme. Mismanagement of the re- sure on their capacity to advance reforms effec- sources, in part due to absent policies or imple- tively. Finally, the system of training and vetting mentation gaps, is undermining the potential of public officials to improve capacity is still limited. these sectors to grow in value and importance in the future. In addition, Albania is under- prepared Recent events highlight the environmental physically or financially for disaster events like the challenges Albania faces, with social and fiscal earthquakes that occurred in 2019. On September implications. Strategic sectors for the economy 21st a 5.6-magnitude earthquake with epicen- and for the livelihood of many poor Albanians ter near Durres caused damages to close to 600 depend on the sustainable management of the homes, and triggered power cuts and other ma- country natural resources, including freshwater, terial losses. On November 26th at least 50 people land, and marine ecosystems. The expansion of died in a 6.4-magnitude earthquake, the strongest these key sectors has potential positive effects in 40 years, which again hit Durres. Aside from the on all the main challenges for Albania: growing human and material losses and the trauma they more open, by growing exports higher up in the cause on the population, the cumulative fiscal value chain; balancing urban and rural develop- costs of disaster recovery will put further pressure ment by creating more opportunities for jobs in on Albania’s vulnerable fiscal situation.17 17 The recent Post-Disaster Needs Assessment estimates that total damages and losses of the November 26 earthquake amount to 985.1 million EUR, while total recovery needs are estimated at 1.1 billion EUR (Government of Albania, 2020). ALBANIA’S ECONOMIC DEVELOPMENT SINCE 2014 21 THREE STRATEGIC OBJECTIVES FOR OF ALBANIA’S FUTURE TRANSFORMATION raises productivity, generates quality and inclu- sive jobs, and is sustainable. A greater integration into the regional and global economy is needed to drive demand that transforms and generates opportunities in line with a more educated labor force. Given Albania’s small size and still relative- ly shallow domestic market, further progress on integrating into the regional and global economy The SCD Update proposes to identify the pri- is a key pathway towards greater productivity and orities for Albania to accelerate progress in higher incomes. Its dependence on agriculture the context of the recent trends and the EU and high rural poverty call for strengthening local accession process. Following consultations in- service delivery and modernizing the agriculture ternally and with Albanian stakeholders, the SCD sector, while enhancing the benefits and competi- Update organizes the analysis around three main tiveness of urban areas. Further, the low access to Strategic Objectives: first, the need to strengthen good job opportunities for many Albanians, cou- the open-economy, productivity-driven growth pled with falling and aging population calls for model; second, the need to strengthen the decen- strengthening economic inclusion. tralization process to balance territorial develop- The success of policies to achieve the Stra- ment; and third, the need to strengthen the social tegic Objectives will depend on whether the contract by increasing economic and social inclu- country is able to consolidate the pre-condi- sion. Policies that address these objectives could tions of sustainable growth. First, Albania needs achieve a true structural transformation that institutions that fit a modern economy, and here FIGURE 9. The SCD organizing framework Integrating into Opportunity the global economy EU accession Strategic Making local Objetives governments more PRIORITIES e ective On-going Enhancing social and economic inclusion Economic Less inclusive Decentralization openness growth 22 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 the EU presents a roadmap that is already pro- be a major contributor to the transformation of ducing some results. Lower corruption and a solid the economy, provided that there is a clear strat- rule of law enhance public trust and facilitate eco- egy to utilize these resources sustainably, rather nomic transformation. Second, progress in fiscal than deplete them. The SCD Update proposes and macroeconomic stability need to continue to then policy priorities that address the Strategic enable the country to manage shocks and grow Objectives and also strengthen the pre-condi- fiscal resources to deliver better services and pro- tions, as depicted in Figure 9. tect the most vulnerable. Finally, Albania is bless- ed with a bounty of environmental assets that can THREE STRATEGIC OBJECTIVES FOR OF ALBANIA’S FUTURE TRANSFORMATION 23 STRATEGIC OBJECTIVE 1: INTEGRATING INTO THE GLOBAL ECONOMY leads the WB-6 in terms of exports (Figure 11). While Albania is gradually taking advantage of its location in the Adriatic – with Mediterranean climate, significant coastline, rivers and moun- tains – and significant historical heritage to grow its exports in tourism services, the exports gap re- mains particularly pronounced in goods. In 2018, Albania exported 7.7 percent of GDP, as opposed Given the limitations of Albania’s small domes- to 42.3 percent of GDP in Northern Macedonia. tic economy (population: 2.9m), the continued More firms are exporting directly or indirectly shift towards global markets can be a key path- (16.4 percent in 2019, compared to 12 percent in way towards creating more and better jobs. 2013), which suggests that Albania is gradually The Western Balkans represent a population of seizing opportunities in the global marketplace, close to 18 million – and beyond lies the European but the gap to the ECA-average of 19.2 percent Union with its more than 500 million. Economic remains significant.20 Besides quantity, the qual- integration can facilitate access to a larger and ity of Albanian exports can also be improved. In more affluent customer base, a greater pool of 2017, only 3.6 percent of Albania’s merchandise qualified workers, additional sources of financing, exports were in medium of high-tech industries new technologies and more sophisticated produc- – as opposed to 59.6 percent in North Macedo- tion inputs. A larger market, with an even playing nia. With close to 50 percent of exports going to field in which all firms can compete, can reorient Italy, Albania can also gain from diversifying ex- production inputs from less productive industries port destinations.21 A range of sectors of Albania’s to more competitive enterprises - encouraging economy have the potential to be key drivers of innovation as well as skill and technology trans- export performance in the years to come.22 fer from more developed markets.18 This process While Albania’s overall FDI performance has is particularly valuable for countries like Albania, been strong in recent years, with yearly inflows whose domestic markets are relatively small and around 8 percent of GDP, it has had limited suc- lack advanced businesses. Traditionally, among cess in attracting FDI that establishes new com- small countries, high income per capita is closely panies in Albania (so-called greenfield invest- correlated with trade openness (see Figure 10).19 ment). The majority of Greenfield investments in The potential for a stronger trade integra- Albania have been market-seeking (driven by an tion remains significant. For example, in 2018, investor’s intention to establish production facili- exports of goods and services reached 31.7 per- ties in the host economy, with the ultimate intent cent of GDP – still far behind the 60.3 percent of supplying goods and services to the host coun- of GDP reached by Northern Macedonia, which try’s market), while less than 1 percent has been 18 Shu & Steinwender (2019) provides a useful literature review of the impact of trade liberalization on firm productivity and innovation. 19 Brookings (2018) 20 World Bank Enterprise Surveys (2019). 21 See Rovo & Portugal (2019). The assessment of the trade performance of the WB-6 through a full gravity model also finds low trade open- ness in the Western Balkans, including Albania. See European Commission (2018). 22 See Annex 3: Strategic sectors for Albania’s export-oriented growth model and International Financial Corporation (2020 forthcoming). 24 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 FIGURE 10: Country size, trade openness and income relation in Europe and Central Asia Source: World Bank World Development Indicators (WDI) Ireland 115 Exports of goods and services (% GDP) 95 Slovak Republic Hungary Slovenia Belgium Lithuania 75 Estonia Czech Republic Cyprus Bulgaria Latvia Denmark 55 Serbia Austria North Macedonia Croatia Sweden Montenegro Portugal Finland 35 Greece Bosnia and Herzegovina Albania Kosovo 15 0 2 4 6 8 10 12 Population (million) Income above 20 thsd USD Income below 20 thsd USD FIGURE 11: Albania’s trade performance vis-a-vis Western Balkan peers (magnitude and quality) Source: World Bank World Development Indicators (WDI); 2018 data Source: World Bank World Development Indicators (WDI); 2017 data; data for Kosovo not available Trade openess (the sum of exports and imports High and medium tech exports of goods and services, as percent GDP) (% merchandise exports) North Macdeonia North Macdeonia Serbia Serbia Montenegro BiH BiH Montenegro Kosovo Albania Albania 0 20 40 60 80 0 20 40 60 80 100 120 140 STRATEGIC OBJECTIVE 1: INTEGRATING INTO THE GLOBAL ECONOMY 25 FIGURE 12: Backward and forward participation in GVCs Source: Authors with data from UNCTAD-Eora GVC Database 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% LUX SVK HUN EST CZE SLV MKD LTU IRL POL ROU LVA HRV BLG BIH ALB Backward Forward efficiency-seeking (when investors seek to in- investor base, including FDI with strong integra- crease cost-efficiency of production, by taking ad- tion with the rest of the economy.23 vantage of various location-specific competitive Integration into global value chains (GVCs) factors, such as knowledgeable workforce, supply holds the promise to boost incomes. The World of key inputs, and like transport or logistics). This Bank World Development Report 2020 Trading is important because efficiency-seeking invest- for Development in the Age of Global Value Chains ment is export-oriented and has the potential to highlights the potential for GVCs to boost in- help Albania improve the productivity of its work- comes, create better jobs and reduce poverty.24 force and connect domestic suppliers to Global Already, the integration of Albania with the Ital- Value Chains. Between 2011 and 2016, 17 percent ian garment industry illustrates the potential for of Greenfield investment projects were in trans- exploiting such synergies. The rapid growth of port and logistics services, followed by 13 percent business process outsourcing (BPO) industry also each in financial services and business services. holds significant promise. Still Albanian GVC par- Since FDI is a key source of external financing, can ticipation has continuously fallen since 2014 and introduce advanced know-how into the country remains the lowest in the region at 55 percent of and link Albania to Global Value Chains, it is key gross exports (Figure 12). Backward linkages have that a favorable investment environment for for- also declined, suggesting increased participation eign investors is created. Albania needs a broad in low value-added levels of the GVC. 23 See Financial Times fDi Markets database. 24 World Bank, World Development Report 2020, Trading for Development in the Age of Global Value Chains (2019) 26 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 Significant emigration is a symptom of lim- portant source of funding for the economy, but ited economic opportunities at home, which in they can be channeled towards productive invest- turn exacerbates Albania’s skills shortage – yet ment rather than consumption. Returnees can Albania’s diaspora can also represent an op- bring new ideas and invest in local businesses, portunity for further integration into the glob- though they represent a small share of the dias- al economy. Driven by high levels of unemploy- pora. Albanians abroad, on the other hand, could ment and under-employment, low incomes both serve as anchors to develop Albanian trade with in formal and informal sectors (sometimes paid neighboring countries.26 with delay), limited social protection and low pro- Integration goes beyond economics alone - vision of social services, many Albanians have left the path towards EU membership is an oppor- the country. Currently around half a million Alba- tunity to strengthen Albania’s institutions and nians live abroad. to develop a sizeable diaspora to transform society. The 35 chapters of the EU abroad (relative to population).25As emigration accession process range from the reform of purely has been traditionally particularly pronounced economic institutions all the way to fundamental among the young, dynamic and educated, this rights of its citizens and rule of law. As such, the brain drain has exacerbated the domestic skills process offers an external anchor for transforma- gap. Yet, the diaspora also remains a potential tion of Albania’s institutions towards a more free, connector between Albania and the rest of the just and open society. world. Remittances are – and will remain – an im- 25 INSTAT & International Organization for Migration (2013). 26 Felbermayr, Grossmann, & Kohler (2015); Parsons & Vézina (2018); Rauch & Trindade (2002) among others find that migration can strengthen trade ties. STRATEGIC OBJECTIVE 1: INTEGRATING INTO THE GLOBAL ECONOMY 27 MAIN CHALLENGES mandatory translation of all the documentation into Albanian; service sectors also face numerous barriers to trade, including several types of work authorizations needed in Albania to allow for la- bor mobility.29 In terms of border procedures, ac- cording to the 2019 enterprise survey, it takes on average 1.1 days to clear exports through customs (1.8 days for imports). While this is ahead of many Trade restrictions continue to hold back ex- other countries in the ECA region, more can be ports and imports.27 According to the most recent done - including establishing more joint border WTO trade policy analysis in 2016, Albania has a crossings with neighboring countries and encour- liberal trade regime, with relatively low tariffs for aging adoption of simplified border procedures importers and no export duties or taxes. Similar- for Authorized Economic Operator (AEOs). ly, Albanian exporters face relatively low tariffs However, the key challenge is to nurture a in their current market destinations, although more competitive and innovative private sec- applied tariffs (both simple and trade weighted) tor that can successfully integrate into the for non-agricultural products are relatively high global economy – this requires further efforts among peer comparators (Source: WTO). Despite to strengthen Albania’s underlying business favorable trade conditions as by the existing trade environment. Albania’s Structural Business Sur- agreements (including EFTA AND CEFTA), Albania’s vey highlights that the productivity of Albanian export expansion may be constrained by the lack firms is still at only 10-15 percent of their EU coun- of agreements with potential trade partners, gaps terparts. The Harvard Center for International De- in the coverage of existing agreements and also by velopment Economic Complexity Index ranks Al- the likely existence of non-tariff measures (NTMs). bania at 78th place out of 133 countries. The 2019 For example, quality standard for agricultural World Global Competitiveness Report ranks – out products constitutes one of the main constraints of 141 countries - Albania 117 in entrepreneurial for exports from Albania. Albania’s quality certifi- culture, 126 in attitudes to entrepreneurial risks cation processes are insufficient for export to the and 132 in the readiness of companies to embrace EU-28, as well as usually too costly or hard to ob- disruptive ideas. The latest World Bank Enterprise tain within the country for smallholders.28 Other Survey reports that Albanian firms are introduc- non-tariff barriers relate to non-automatic licens- ing more new products and spending more for ing and cumbersome procedures. For example, as R&D and process innovation – but they continue emerged also during interviews of the World Bank to significantly lag regional peers (Figure 13). In with firms, agribusiness processors need to apply part, this know-how gap reflects Albania’s histori- for authorization to operate; cumbersome proce- cal legacy of international isolation under a com- dures are in place in the import/export (as well as mand economy; it takes time for the emerging in public procurement) which require in addition private sector to fully transition towards a more 27 For more detailed analysis of Albania’s trade performance and constraints, see also Rovo & Portugal (2019). 28 World Bank, Competitive Fruit and Vegetable Products in Albania, FCI in Focus (2018). 29 Handjiski & Sestovic (2011). 28 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 FIGURE 13: Albania vis-a-vis peer countries in firm-level innovation and technology adoption (% firms) Source: World Bank Enterprise Surveys (2019) Use technology from foreign companies 60 50 40 ALB 30 BiH 20 KSV 10 MNE Introduced new process 0 Spend on R&D MKD SRB ECA Introduced new product/service advanced production base.30 However, in part this prise survey of the World Bank, 37 percent of firms also reflects continued weaknesses in Albania’s report that the country’s large informal sector is a business environment that need to be tackled. major constraint, creating unfair competition and holding back the growth of formal businesses. Widespread informality remains a particu- Besides strengthening the enforcement through larly notable bottleneck for Albania’s private anti-informality campaigns, the likely path to for- sector. According to the International Labor Orga- malization of Albania’s economy is to strengthen nization (ILO), 31.9 percent of employment in Al- the business environment – incentivizing formal- bania is informal (2016). Without documentation, ization by strengthening its benefits while reduc- informal firms are cut out from access to formal ing its costs. The IFC’s Country Private Sector Di- finance, key government support services as well agnostic will provide an in-depth analysis of the as exporting. Firms in fact have a disincentive to constraints to a more competitive and dynamic grow and upgrade, preferring to stay under the ra- private sector in Albania (Box 2). dar to avoid being detected by the Authorities, pe- nalized and becoming subject to the costs of for- malization, including paying taxes and complying with business regulations. But informal firms do not just hold themselves back. In the 2019 enter- 30 In the textiles, apparel and leather sector for example, the average EU firm is 5 times more productive than the average Albanian firm. This means that the Albanian garment firm needs 5 times as many workers to produce the same output as the average EU firm. Compar- ing Albanian firms with each other, the productivity of a firm at the top 10 percent of the performance distribution is close to 4 times as high as for a firm in the bottom 10 percent of the sector. See also Brookings (2019). MAIN CHALLENGES 29 BOX 2: Outline of the IFC’s Country Private Sector Diagnostic Source: International Financial Corporation (2020 forthcoming) The Country Private Sector Diagnostic (CPSD) for Albania will assess the barriers and opportunities for a more forceful development of the private sector in the country. Higher, more sustainable and equitable economic growth can only be achieved through a thriving private sector. More than 50,000 firms were created between 2013 and 2017, generating more than 60,000 jobs. Firms have also become more likely to export and innovate, but they still face many constraints. The CPSD will identify policy reforms to increase private investment and create market opportunities in specific sectors key growth and poverty reduction (proposed sectors include agriculture/agribusiness, tourism, ICT, garments, and auto-parts manufacturing). The selection of sectors will be based on a combination of criteria including the government medium term development strategy, recent sector growth performance, contribution to GDP growth, exports and employment generation, as well as ability to support the IFC 3.0 agenda of Creating Markets and the IFC investment pipeline in Albania. The CPSD will seek to identify: (i) opportunities for achieving development objectives through an expansion of the private sector; (ii) constraints to achieving that expansion; and (iii) the actions needed to remove those constraints, be it sector- specific or economy-wide, and realize the opportunities. 30 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 OPPORTUNITIES FOR PROGRESS world, (b) impede the flow of resources towards the most productive uses domestically, and (c) create disincentives to invest in innovation, entre- preneurship and know-how. An improved alloca- tion of resources within the economy will create rapid gains in productivity that generate momen- tum. Greater entrepreneurial spirit, technolog- ical awareness, innovation and know-how, and If managed well, economic integration, pro- increased availability of skills and finance create ductivity growth and rising incomes can set in more incentives to take the risks needed to join motion mutually reinforcing feedback loops. global markets. The shift to a more open econo- Economic integration can allow Albanian firms to my and a competitive private sector also requires grow and upgrade their capabilities. At the same eliminating ambiguities in the law and excessive time, economies of scale and innovation can en- discretion in its application. While further opening able Albanian firms to better compete on interna- the economy is critical for Albania’s future, there tional markets. For that shift in the development will be winners and losers, so this process must model to work better, it is necessary to remove be managed to minimize the social losses and en- constraints that (a) reduce the exchange of goods, sure that a maximum number of people benefit services, factors and ideas with the rest of the from it (Box 3). BOX 3: Managing the process of integrating into the global economy While further integration into the global economy is a key opportunity for Albania, risks from this process need to be managed: (1) Displacement from trade: domestic industries exposed to imports from higher-quality or lower-cost foreign competition will face disruption. Some firms will become more competitive, while others will fail. Yet, Albanian consumers will gain from increased access to better products. In the short term, this process will also create losers among employers and workers. To facilitate this transition, it is crucial to enhance the training and social assistance systems to support displaced workers and enable them to access new job opportunities. (2) Dual labor markets: FDI can spur the emergence of a dual labor market where firms compete for high-skilled workers and raise their wages while most workers continue to earn low wages. To counteract this polarization, it is important to encourage backward linkages between foreign and domestic firms, so that more domestic workers benefit indirectly from FDI; and foreign firms need to contribute to public revenues on the same footing as domestic firms. (3) Increased out-migration: stronger trade and investment linkages with the rest of the world will increase opportunities for Albanian workers to move to foreign labor markets and exacerbate brain drain. To reduce the loss of human capital the country needs to maintain strong ties with its large diaspora, encouraging investment by Albanians abroad and return migration. The transition towards a fully open and globally integrated economy will unleash many new opportunities for growth but it will also create winners and losers. Harnessing Albanians’ support for this process will need policies to mitigate the losses to affected groups and alleviate their plight to the extent possible. OPPORTUNITIES FOR PROGRESS 31 Macroeconomic sustainability is a crucial (out of 190 countries) in the 2020 World Bank Do- pre-condition for private sector development. ing Business ranking. Key drags are longwinded Albania’s emergence has been marked by a se- procedures to get construction permits, paying ries of crisis setbacks – including a macro-fiscal taxes, as well as the cost of enforcing contracts.31 crisis 2008-14. In each case, it has taken years to Nurturing market competition is needed to recover lost ground in terms of private sector de- drive change. For the adoption of some innova- velopment. Equally, Albania’s policy environment tions, new entry by a firm unencumbered by the remains subject to frequent changes – leaving en- old ways of doing business is key. Sometimes, the trepreneurs uncertain over future business condi- threat of competition can shake up an incumbent tions and deterring long-term investment. Today, firm to reorganize its business. Albania has done a key challenge to economic stability is Albania’s much to shift to a market economy; but that shift high public debt. The World Economic Forum has been accompanied by the emergence of an- Global Competitiveness Index 2019 ranks Albania ti-competitive practices that limit entry and the at rank 114 out of 140 countries in terms of debt mobility of resources within the economy. Accord- dynamics. Raising public revenues by broadening ing to the 2019 Global Competitiveness Report, the tax base, strengthening spending efficiency Albania ranks 120th in domestic competition, and containing off-budget fiscal risks are all cru- including 113th in the extent to which taxes dis- cial pre-conditions for growth. torts incentives and 130th in the extend of market Reliable and effective contract enforcement dominance. The principle of open and fair market is needed for entrepreneurs to invest and up- competition needs to be protected at all times, grade firm capabilities. The 2019 Albania enter- enshrined in the legal framework and reinforced prise survey finds that 43 percent of firms iden- through practice. tify corruption and 40 percent identify the court Access to finance is needed to fund invest- system as major constraints for their business. ment. Albania’s financial sector ranks at 102nd To strengthen investor protection, a formal and place out of 141 countries in the World Econom- effective grievance redress mechanism needs ic Forum 2019 Global Competitiveness Report. to be implemented. The current temporary stra- Credit to the domestic private sector represents tegic investments law needs to be replaced by a only 35 percent of GDP compared to above 50 permanent unified investment law which creates percent in regional peers, reflecting very low long-term planning certainty for both domestic credit-to-deposit ratios at Albania’s banks. Micro, and foreign investors. A particular constraint in Al- small and medium sized enterprises (MSMEs) – bania is lack of legal certainty on land rights, with the backbone of the Albanian economy – face many land titles in the property registry contested significant constraints in accessing finance. 21.2 in court and not matching reality on the ground. percent of firms report access to finance as a ma- In the 2019 International Property Rights Index, jor constraint in Albania.32 The financial sector is Albania ranks 122 out of 129 countries. Finally, dominated by banks which are characterized by the cost of doing business in Albania needs to be high levels of liquidity, strong risk aversion af- further lowered. Albania remains at 82nd position 31 These issues are developed in detail in the Country Private Sector Diagnostics International Financial Corporation (2020 forthcoming). 32 This is up from 8.4 percent of firms reporting access to finance as a major constraint in 2013, potentially reflecting increased needs for access to finance as the economy develops. World Bank Enterprise Surveys (2019). 32 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 ter the financial crisis and lack of proper incen- fewer years of schooling than those from high tives or capacity to explore new and innovative backgrounds, and students in rural areas score approaches to finance. Although on a declining at a level equivalent to having one year less of trend NPLs remain high at around 11 percent schooling than their urban peers. Low relevance burdening banks’ balance sheets and their abil- of education for the labor market is another issue. ity to lend. At the same time the MSME sector is For instance, the 2019 Albania Enterprise Survey generally characterized by informality (especially reports that an inadequately educated workforce in agriculture), limited availability of collateral, is among the top 3 constraints to business de- low quality of financial statements and limited velopment for a significant share of medium and financial capability. Finally, improvements in the large firms. Indeed, low-quality education leads to enabling regulatory framework and a supportive lower productivity later in life: the productivity of financial infrastructure are essential to encourage a child born today will reach about 62 percent, at sustainable, viable, and significant improvements age 18, of what it could be with a complete educa- in access to finance. Beyond banks, the financial tion and full health. Finally, higher education en- sector remains shallow and undiversified. Accord- rollment doubled in the last decade to 61 percent, ing to the Global Competitiveness Report 2019, bringing Albania closer to the OECD average (68 Albania ranks 81st out of 141 countries in terms of percent), but quality and relevance have not kept venture capital availability. up. In 2014, the inspection of Higher Education In- stitutions found a large share of non-compliance Upgrading workforce skills is a pre-requi- with the Ministry of Education’s standards. More- site for more sophisticated industries. The Hu- over, fewer than 10 percent of tertiary graduates man Capital Index (HCI) ranks Albania at 56 of 157 come from engineering, manufacturing and con- countries in 2018, placing it at the bottom of the struction programs (half the rate of EU compara- top tier. However, years of education are signifi- tors), and they have strong incentives to migrate to cantly below Western Europe: at age 15-19 Alba- EU countries where demand for skills and salaries nians and Western Europeans have similar years are high.35 of education (about 9.5) but at ages 20-24 the gap widens to 1.4 years and grows by a year at ages Investment in Albania’s connectivity infra- 25-29.33 Moreover, the quality of basic education structure can unlock positive feedback loops is below EU comparators; the 2018 Programme for between greater firm capability and greater International Student Assessment (PISA) shows integration with the global economy. The World that on average, Albanian 15-year-olds perform at Bank’s 2018 Global Logistic Performance Index a level equivalent to having about 1.5 fewer years places Albania in 88th position, compared to 123rd of schooling than the EU average in reading and in 2016, albeit behind peers. Still, fundamental math.34 Learning outcomes are also unequal, as infrastructure bottlenecks remain. A 2018 IMF re- students from low socio-economic background port estimates that Albania has the largest infra- score at a level equivalent to having about 1.5 structure gap in the Western Balkans.36 The 2019 33 Wittgenstein Centre for Demography (2018). 34 PISA is the OECD’s benchmarking tool to assess achievement and application of key knowledge and skills of 15-year-olds. In 2018, over half a million 15-year-olds from 79 countries and economies took the PISA test in reading, mathematics and science with a focus on reading. 35 See Country Private Sector Diagnostics International Financial Corporation (2020 forthcoming). 36 Atoyan, et al. (2018). OPPORTUNITIES FOR PROGRESS 33 World Global Competitiveness Report ranks Alba- Beyond physical connectivity, digital connectiv- nia 120 out of 141 countries regarding transport ity can connect Albania with ideas and business infrastructure, reflecting an underdeveloped road partners abroad and is essential to drive firms’ network, very limited railroad activity and low air- digitalization process. The Digital Economy and port connectivity. Moreover, ICT adoption is the Society Index (DESI) 2019 report finds that the third-worst performing indicator, after capacity digital transformation of European businesses is for innovation and financial markets.37 A recent driven by fast broadband connectivity, social me- World Bank report on “critical connectivity” re- dia and mobile application.39 These connectivity port ranks Albania at the bottom of the ECA region upgrades will enable trade, FDI and return migra- in a broad connectivity index. Better physical and tion that can bring in foreign knowhow and cata- digital connectivity is needed as basis for the flow lyze economic growth. In turn, firms with greater of goods, people and information.38 Public invest- capabilities have the potential to better compete ment in key transport assets (first maintenance on international markets. Firm upgrading and in- and then new construction) is needed, as long tegration into the global economy therefore can as public financial management arrangements unlock mutually reinforcing feedback loops that can be strengthened to ensure value-for-money. lead to higher incomes. 37 World Economic Forum, Albania Global Competitiveness Index 4 (2018) 38 Notably digitalization will be an important part to that process as research shows that companies adopting digital technologies are 26 percent more profitable than their industry peers (Gould 2018). See Capgemini Consulting; MIT Center for Digital Business (2013). 39 Index adopted by the European Commission to track the Digital Competitiveness of the EU Member States. 34 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 STRATEGIC OBJECTIVE 2: MAKING LOCAL GOVERNMENTS MORE EFFECTIVE towns. As older and more vulnerable people are left behind, living conditions deteriorate, services become scarcer, and these regions become ever more dependent on remittances to survive (Box 4). Unless urbanization is better managed to ac- celerate improvements in competitiveness and quality of life in cities, basic services across re- gions are improved and the economic potential The lack of economic opportunities and low in rural areas is supported, spatial inequality will quality of services have been pushing people continue, and urban economic growth will wane. out of rural areas for the last three decades. In At the same time, the decentralization of the last 25 years, urban development in Albania government functions is still a work in prog- has been propelled by migration to the central re- ress. While Albania has been undergoing a grad- gion (Tirana–Durres) and to the Western Lowland, ual decentralization process for the last two de- increasing urban sprawl over agricultural and va- cades (Box 5); major reforms took place in 2015 cant natural land. This process continues; in 2016, and 2017. First, the government reduced the Tirana and Durres’ population grew by about number of municipalities from 373 to 61 with the 14-16 percent, while Berat, Diber, Gjirokaster aim of achieving higher efficiency by creating larg- and Kukes had net out-migration of between 20 er, more connected municipalities. Second, the and 27 percent.40 Unfortunately, this haphazard law on local government financing established urbanization process has failed to create a con- a roadmap for fiscal and budgetary autonomy nected network of cities that sustain both urban and discipline. Law no. 8652 of 2000 transferred and rural sectors.41 Population pressure in the many basic functions to municipal governments, Tirana–Durres area has outpaced investment in and the recent administration reform extended infrastructure and primary services, and the re- the functions to fire departments and pre-school sulting congestion has reduced the quality of life education.43 However, in many cases, overlaps in these area as well as the gains from urbaniza- between the functions at the national and local tion and the capacity to compete and offer quality levels remain, as well as an unclear division of jobs. Indeed, Tirana, the largest, best connected responsibilities both of which create uncertainty and richest city, is growing below regional com- and undermine the quality of the services. parators.42 This happens while the potential of the To reduce spatial disparities, Albania needs rural economy remains untapped and quality of to offer equitable access to opportunities and life continues to deteriorate in small villages and 40 See INSTAT, Regional Statistical Yearbook 2017 (2018). 41 According to the administrative structure of 2011, Albania had 74 municipalities considered “urban”, but population-based classifica- tions show fewer than 37 urban settlements (defined as continuous groups of cells including at least 5,000 inhabitants), and only 5 of those would have a status of “city” by OECD criteria (Tirana, Durres, Shkodra, Elbasan and Vlora). This reflects the fact that many small municipalities lack the basic functions of a city that connects people and facilitates exchanges of goods and services, and that aggregates centers of production and knowledge to generate synergies and spillovers. 42 See World Bank, Boosting the Competitiveness of Tirana, Policy Note (2019). 43 Functions that were transferred to municipalities include social services; preschool education staff and support staff for the pre-universi- ty system; forest and pasture management; management of the secondary and tertiary sewerage system for irrigation and drainage; fire rescue centers; and rural road management. STRATEGIC OBJECTIVE 2: MAKING LOCAL GOVERNMENTS MORE EFFECTIVE 35 BOX 4: Quality of life and migration in lagging regions of Albania, and the “100 Villages” program Source: CoPLAN Institute for Habitat Development; MetroPOLIS shpk (2019); World Bank, Albania, location specific notes, Western Balkans Urbanization Review (2019) Case studies of poor villages in the lagging regions of Kukës and Dibër highlight the dynamics of isolation, lack of opportunities, and poverty. Household dependence on remittances and social assistance is common, though in many villages, remittances had declined in recent years as previous migrants became settled into their destinations and established their own families. In most villages, over half of residents had emigrated and villages had seen their populations dwindle with mostly the elderly remaining. Village residents reported that more people would migrate if they could afford it, indicating that the poorest were not the ones leaving. Life in the villages is difficult: agricultural productivity and large-scale farming are limited by small land plots and a lack of access to water and irrigation, and few people available to work the land. Most households who cultivate land do so for their own consumption. A lack of job opportunities meant that few residents were formally employed. Residents report lack of good water supply (their most pressing concern), irrigation, and sewage and solid waste management; limited health facilities (reportedly a factor influencing people’s decisions to migrate). Secondary education facilities were also limited as schools are closing due to population shrinkage. These livelihood and service delivery gaps feed a perception of being left out and village residents feel excluded from decisions about infrastructure investments. Coordination across villages is low, so that common infrastructure projects (e.g. irrigation) do not take place. Some villages have tourist potential, and half of them are participating in a government program to stimulate tourism and promote integrated rural development, but this potential is constrained by poor infrastructure and services. The “100 Villages” program (piloted in 2018-2020) aims to promote rural economies by supporting the development of eco- and agro-tourism that revalues cultural heritage. The program encompasses three municipalities in Kukës and four municipalities in Dibër, and investments are focused on improving infrastructure and human capital. A flagship government program led by the Prime Minister’s office, it requires an inter-sectoral effort involving municipalities, line ministries and public agencies such as the Albanian Development Fund. So far, funding has been limited (by end 2018, around 7.5 million Euro had been commited) so that the government is trying to in close coordination within government institutions and with donors to maximize its impact. 36 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 BOX 5: Albania has undergone a two-decade decentralization process The transition to a market-based democracy in Albania has been accompanied by a gradual process of political, economic, fiscal and administrative decentralization. By 1998 local government units had been created and the Constitution of 1998 established three levels of government: national, regional (qarks) and local (municipalities and communes). In 2000, Albania ratified the European Charter of Local Self- Government, which was followed by the National Strategy for Decentralization and Local Autonomy and the Organic Law No. 8652 “On the Organization and Functioning of Local Government,” which institutionalized and created 12 regions as the second level of local government. Law no. 8652 granted regions the role to design policies and strategies locally and coordinate with the central government, and to provide services delegated by the central government and region’s constituent local units. In 2014 Parliament amended this law with the New Administrative Territorial Reform (Law no. 30/2015 “On the Organization and Functioning of Local Government”), which defines the municipality as the basic level of governmental unit, strengthens the consultation process and creates an administrator figure to increase efficiency in local government management. A National Crosscutting Strategy on Decentralization and Local Governance (Council of Ministers’ Decision No. 691) also outlines a vision on decentralization, where fiscal decentralization played an important role to increase the autonomy of local government units in decision-making and enable them to respond to citizen’s needs. The Law “On the finances of the local self-government,” approved in 2017, establishes foundations for a fiscal and budgetary autonomy and discipline in small local units. The main objectives of the Law are: i) Strengthening financial autonomy, ii) Strengthening fiscal discipline; iii) Strengthening intergovernmental dialogue; iv) Increasing transparency and v) Unification. services for people, regardless of where they exports, or tourism can benefit from targeted pol- live. While the population shift towards urban icies (e.g., well-functioning land markets are crit- centers is inevitable and desirable to some ex- ical), while areas with lesser potential will need tent, a more balanced approach to territorial de- direct support to ensure basic needs are covered, velopment can correct the spatial disparities in and to facilitate mobility by investing in human outcomes and unleash the potential for growth capital. Urban centers can increase their growth in lagging areas.44 Equitable basic services (secu- potential by implementing better territorial plan- rity, education, sanitation, etc.) and connectivity, ning policies to manage population growth, im- both physical and digital, increase the ability for prove services, reduce congestion, and increase people to benefit from growth. Rural areas with connectivity within and beyond the country. potential to grow from agrobusiness and fishing 44 The World Development Report 2009 provides a framework to think about how to rebalance territorial development in Albania (World Bank, 2008). STRATEGIC OBJECTIVE 2: MAKING LOCAL GOVERNMENTS MORE EFFECTIVE 37 MAIN CHALLENGES ed ones (especially for own source revenues), in part due to weak fiscal forecasting capacity, but also because of incentives of local government officials to present ambitious expenditure pro- grams ex-ante.46 In addition, public investment management is deficient, leading to commitment for projects without assured funding, little mon- itoring of project implementation, and failure to Fiscal revenues for local governments are lim- include recurrent costs in outer year budgets. This ited. Although there has been some progress with has resulted in an accumulation of municipal gov- the introduction of the unconditional transfer (no ernment arrears amounting to ALL 11.8 billion in less than 1 per cent of GDP), there are still gaps 2015, when the territorial reform was implement- related to allocation criteria (such as the dated ed, and falling to about ALL 7.1 billion by 2017 (38 population density statistics). Own-generated percent from Tirana). Finally, transparency and revenues only amount to about 14 percent of total accountability about local government financing local revenues, a growing trend but still well be- and expenditures are low. For instance, between low the 24 percent in EU countries.45 Some recent 2010-2015 capital project financing was on aver- changes might improve own revenue generation, age 48 percent higher in politically affiliated local such as a 2-percent allocation of the Personal In- governments, especially during election years, come Tax revenue, and the new methodology for and this trend has increased until 2017.47 The calculating the tax on buildings based on market 2017 PEFA report notes that criteria for allocation value. However, rents from mining revenues allo- of conditional transfers exist, but they are not cated to the local government are low at 5 percent transparent and verifiable, and less rule-based of the revenues from the activity, against 25 per- compared to the unconditional grants.48 Annual cent before 2013. budgets presented to the councils don’t follow a standardized format, and public consultation is At the same time, local governments show irregular. Audit reports are discussed, but there is systemic weaknesses in budget planning, ex- no evidence of impact on subsequent decisions, ecution, and transparency. The first PEFA as- and external audit reports are not available on sessment of public financial management (PFM) municipality websites in an accessible format. Cit- at the municipal level (Tirana, Berat, Fier, Kuçova izen engagement on budget is also limited. and Tropoja) in 2016 found that municipal PFM systems are systematically weaker than national Local governments are increasingly respon- systems. In over 30 categories of PFM all but one sible to ensure service delivery and manage municipalities (Fier) scored significantly below natural resources, but they are ill-equipped to the national government. In many municipalities, do so. For instance, following the territorial reor- actual revenues fall consistently short of budget- ganization, the control and responsibility of mu- nicipalities in water management increased, but 45 Association of Albanian Municipalities (2019) 46 World Bank, Local government transparency, accountability, and capacity in allocating resources (2018). 47 Association of Albanian Municipalities (2019) 48 PEFA Program (2017) 38 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 not the funding for investment in quality of water newly created water utilities managed by munic- supply.49 The network is old and depleted, small ipalities (replacing water user associations) have water supply systems in rural areas are not inte- low capacity and few resources. The irrigation and grated, and utilities have financial deficits, lead- drainage service is also inadequate because of in- ing to large water revenue losses. For example, of sufficient coordination between the municipality, the amount of water produced during 2018 by all line ministry and regional irrigation and drainage water utilities (262 million cubic m), only 55 per- departments and low funding for investment. As cent was measured by utilities for lack of meters, farming transitions from subsistence to commer- a factor that directly affects the reliability of the cial agriculture, it will place greater demands on data.50 Only 36 percent of the amount produced irrigation systems, and policies need to be in place was billed to consumers, and of this amount, to provide the services and recover sufficient rev- only 68 percent was billed by metering (the rest enues to maintain the resource. is billed as a flat fee). Non-revenue water (NRW) The Albanian coastline is under pressure reached 64 percent, slightly less than in 2017, but from the impacts of unsustainable develop- still at quite high levels, and total losses amount ment and pollution, including untreated solid to 62 percent of the produced water, with half of waste. Albania’s unplanned coastal development these coming from administrative losses (meter and intensive construction have led to unman- tampering, double connections, meter by-pass, aged waste disposal and lack of proper waste- and overuse for irrigation by flat-fee billed cus- water treatment facilities.51 Pollution of marine tomers). In contrast, NRW in the EU reaches on av- and coastal waters is increasing, especially in the erage 20 percent (although the variance is large). lagoons, and around beaches plastic litter rep- Illegal connections continue to be a problem as resents more than 90 percent of the total generat- they represent about 25 percent of the amount ed solid waste (half of it coming from land-based of water produced. Continuity of service is low in sources).52 Quantities of marine litter including most areas (only 7 of 58 utilities provide the ser- nano-plastics found in the Adriatic marine envi- vice for 18 hours per day or more). Some utilities ronment are one of the highest in the world, and have managed to raise water tariffs, but one-third plastic litter found in the Albanian part of the Adri- of them was denied a tariff increase by the regu- atic accounts for 28.5 percent of the total. Albania lator. The adoption of a holistic strategy to water has the highest percentage of untreated plas- resources (river basin administration, a water tic waste (73 percent) followed by Montenegro, cadaster, and multi-sectoral support services) Egypt, and Libya.53 The adoption of EU directives and the creation of a national agency to manage on waste management and other environmental water resources are positive steps. However, the regulations has progressed but enforcement re- 49 Albania contains 65 percent of the total surface of water basins of the Balkans (about 43,900 sq. km), with a large variety of water sources. The supply of drinking water mainly comes from natural springs (20 percent) and underground sources (80 percent). The energy sector is the largest consumer of water in Albania, using about 3 percent of all water provision (an almost equal amount to total water flowing in rivers). 50 Water Regulatory Authority (2019). 51 See World Bank, Wastewater treatment in Albania: finding the right balance to finance and operate WWTPs in the short and long term, Strategic Paper (2014). 52 Although some progress has been made with the closure of 89 non-sanitary landfills, institutional capacity remains weak World Bank, Realizing the Blue Economy Potential of Albania, (ID: P171389) (2019). 53 Invest in Albania (2019). MAIN CHALLENGES 39 mains weak. Recycling shares decreased to 17.2 with consequences on proper management of percent of total waste in 2016 from 25.3 percent in their activities. In addition, the reduced techni- 2014, while the largest recycling companies work cal capacity and insufficient staffing affected the below 25 percent of installed capacity. undertaking of several functions like the develop- ment of national forest policy and legislation, na- The transfer of forest and pasture manage- tional reporting and monitoring. While municipal- ment to municipalities increases the risks for ities own the forest and pasture resources, these the sustainability of highly degraded and over- functions are still required at the central level. exploited forest areas. The surface of protected Importantly, municipalities lack the authority to areas in Albania occupies nearly 15 percent of collect fines (a competency of the line Ministry). the national territory and includes 15 national Fire protection is a completely new function of parks, 22 natural reserves, protected landscapes local governments, which has been decentralized and natural monuments. Albania is also part of with no prior analysis of local capability to fulfill the European Green Corridor. However, the sur- this function. face of forest cover has decreased in the last two decades. In 2018 it is estimated that only 6 per- The implementation of disaster risk man- cent of the surface of the country was covered by agement is challenged by the division of re- dense forest canopy (over 75 percent cover) and sponsibilities between the national and local 17 percent was covered by light forest canopy (30 governments. Weather- and climate-related percent cover). Overbuilding, fragmentation, high hazards have historically affected Albania. Floods firewood-use for cooking and heating have con- frequently affect the north and southeast of the tributed to this loss.54 The new function of forestry country, and climate change is expected to result services established in 2016 defines the munici- in more intense and frequent rainfall events, ex- pality as the owner of forests and pastures locat- acerbating flood risk. Drought, heat waves and ed within its administrative territory. Unfortu- forest degradation—also expected to increase nately, the legal framework regarding forestry has due to climate change—are increasing the fre- changed multiple times and local residents have quency of wildfires, affecting the population’s raised concerns regarding the inventory of forests health especially in remote areas, while threat- and pastures and the certification of the owner- ening agricultural and hydropower production.55 ship of the municipality. Even to date, a consider- Earthquakes are rarer but can have significant able number of municipal forest offices are thinly impacts, as seen during 2019 when two strong resourced in terms of office facilities and staffing earthquakes hit the Durres area. The Post Disaster 54 At the same time, air pollution is also high due to high use of firewood; as well as in urban areas due to traffic congestion. A sustainable use of firewood is possible in Albania. For instance, reducing residues lost during harvesting to 12 percent (from 25-30 percent) of wood volume through improved methods to collect and transport residues during harvesting could reduce the amount of harvested wood needed to meet domestic demand by 500,000 m3 per year. Reducing fuelwood moisture content to 30 percent could reduce the demand by 246,000 m3 per year. Improving stove and boiler efficiency would reduce fuelwood demand: a 5 percent efficiency increase could result in a 200,000 m3 reduction in the demand of fuelwood. 55 Damage from the 2002 floods exceeded US$23 million, while the 2010 floods on the Drin River resulted in at least US$30 million in dam- ages. Urban flooding is another risk as urban storm water systems struggle to cope with more intense rainfall; Shkodra is at particularly high risk. It is estimated that a 100-year return period flood (1 percent annual probability of occurrence) would affect about 6 percent of GDP and 7 percent of the population, and that on average every year floods affect about 50,000 people and $200 million of GDP. In addition to threatening people, property and agriculture, floods pose a significant risk to the transportation and trade network: average annual losses from floods along the two most critical road corridors (Tirana to Durres and Durres to Vlore) are estimated at about $15 million, while bridges and culverts along the primary road network are estimated to suffer over US$20 million annually (GFDRR, 2015). 40 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 Needs Assessment completed in February 2020 ferring the main responsibilities for DRM to the indicates that the total effects of the magnitude municipalities. So far, the new National Agency 6.4 November 26th earthquake in the 11 affect- for Civil Protection is under-resourced, and the ed municipalities reached EUR 985.1 million in municipalities lack the resources and capacity to damages and losses and caused a reduction in implement a proactive policy, resulting in weak GDP growth of 0.5 percentage points for 2019.56 DRM implementation across the country. Lack of Despite Albania’s high-risk exposure, the gover- pro-active risk management and planning has led nance and capacity to manage these risks are still to dependence on external capacity and funding weak. In July 2019, Albania approved a new law to respond to and recover from larger scale disas- on civil protection, which presents a modern and ters. Considering the general unreliability of aid progressive approach to disaster risk manage- and increasing disaster risk due to climate change ment (DRM). Under the same law, the government and urban development, Albania should pursue a created the National Agency for Civil Protection more systematic approach to fiscal contingency within the Ministry of Defense, while also trans- planning and risk financing. 56 European Union; Government of Albania; UNDP; World Bank (2020) MAIN CHALLENGES 41 OPPORTUNITIES FOR PROGRESS cal governments need increased resources, they also need more efficiency, transparency and ac- countability in the use of their current resources. Requirements for transparency combined with a system of performance grants linked to good gov- ernance conditions can create better incentives to generate results. The dissemination of audit re- ports can help citizens judge the performance of The government is investing to raise the PFM the local authorities and empower citizens in their capacity of local governments. The central gov- political selection, and to demand accountability. ernment has made efforts to increase the capaci- Performance grants linked to the fulfillment of a ty of local governments to produce accurate bud- set of governance conditions, quality of budget gets and monitor and report their expenditures execution, and outputs can be an added incentive with transparency. The Ministry of Finance and to enforce the law. Economy has produced guidance on the identifi- Financing oriented to results can improve cation of local taxpayers, procedures for prepar- outcomes. Municipalities are responsible for pro- ing and reporting on the Mid-Term Budget Plan viding pre-university education (except vocation- (MTBP), monitoring implementation of the local al schools), but the financing and management budget, determining external-audit cases, dead- of the system has traditionally been led by the lines, and standards; preparation of consolidated Ministry of Education. Financing was historically financial statements, procedures for managing fi- allocated on the basis of the number of teachers, nancial difficulties and insolvency situations. The leading to an unbalanced student-teacher ratio Ministry has also prepared a Financial Planning across municipalities. Recently, the preschool fi- Tool for the preparation of the MTBP, it has set nance system shifted to a per-student allocation, up a Help Desk to help municipalities implement to bring the ratio of students per teacher to a max- it, and it has increased the transparency of local imum of 18, thus reducing overcrowding and in- government public finances by updating the local creasing the quality of education for this group. In government finance portal periodically. It also is- other areas of human development, however, low sued a simplified Citizen Budget (clear and simple financing and incentives seriously limit the abili- summary guide) that is publicly available. Finally, ty to deliver any services, especially to the most the it has taken steps to reduce the risks of new vulnerable. For instance, primary health service local arrears by requesting local governments to personnel in local health care centers does not report quarterly on accumulated arrears and their consistently follow basic patient attention pro- repayments. These efforts are supporting prog- tocols, and there is little or no monitoring, train- ress, but more needs to be done to generate the ing, and educating of patients.57 Municipalities right incentives. lack financial resources and data on basic welfare Increased revenue generation and a more outcomes to design and deliver the appropriate efficient planning could be stimulated by per- social services. Social housing needs are unmet formance-based grants. While it is clear that lo- (about 30 percent of excess demand on average). 57 World Health Organization (WHO) (2018). 42 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 FIGURE 14: Composition of domestic supply of agricultural products, 2013 Source: FAO Food Balance Sheets Wheat and products Tomatoes and products Meat Fruits, Other Olives (including preserved) Oranges, Mandarines Fish Beverages, Alcoholic Lemons, Limes and products Olive Oil 0 100 200 300 400 500 600 700 1000 tonnes Export Import Production Vulnerable groups such as victims of domestic vi- gration of agricultural workers). As a result of low olence have little support in terms of sheltering productivity, agriculture contributes 22 percent to and access to health and legal services. People GDP although its share in employment is about 40 with disabilities rarely find municipal services for percent. Most agricultural production is driven by care and rehabilitation. Finally, young people re- own consumption needs, with excess production ceive little support for accessing job and training sold in local markets, and agricultural exports are opportunities, which encourages them to migrate marginal (Figure 14). Value chains are fragment- to larger urban areas. Strategic Objective 3 devel- ed, and earnings are low. Farming is a source of ops in more detail other policy options to reduce both food and income security, with older people human development gaps in Albania. especially relying on it to complement pension or remittance income. A third of agricultural workers Rural earnings could significantly increase are above 65 years of age and most have low ed- if agricultural productivity rises. Albania’s agri- ucational levels. Women represent half of agricul- culture sector consists of over 350 thousand farms tural employment in Albania, a larger share than with small and fragmented farming plots of 1 hect- in any Western Balkan country, and female work- are on average, and with the lowest value added ers represent 80 percent of all informal workers in per agricultural worker in the Western Balkans. agriculture. Capital availability is low, for instance, Over the past decade, agricultural labor productiv- lending to agriculture makes up only 1.5 percent ity increased by 45 percent in Albania, a similar in- of total lending to the economy and farmers in the crease to the average EU country, but still ranks the EU-28 use on average 710 tractors per 100 square lowest in the region (and it is mostly due to outmi- OPPORTUNITIES FOR PROGRESS 43 km of arable land, whereas Albanian farmers use riculture public expenditure is on the right track 120. 58 Given these constraints, the capacity for in- to increase the competitiveness of the sector novation, scale production, processing and export with its the focus on on-farm capital investments are very limited. and rural development. Between 2010 and 2017, about 65 percent went to rural development, and Albania can boost rural incomes by expand- around 10 percent to market support and direct ing agricultural production and exports. Al- payments. Positively, agricultural spending has though Albanian agricultural exports are signifi- shifted towards capital expenditures. Increased cantly below potential, Albania already has some capital intensity needs to be accompanied by competitive edge in vegetable exports, which it improvements in knowledge to increase produc- could expand further. It is a leading exporter of to- tivity. It is estimated that closing ¼ of the gap to matoes (25 percent) and salad cucumber (11 per- EU-28 level of agricultural capital stock per work- cent) in the region, following North Macedonia (53 er would increase labor productivity by 76 percent percent and 48 percent). It accounts for 5 percent in Albania.60 However, agriculture public expendi- of the regional paprika market and has experi- ture is low compared to regional peers. Between enced the fastest growth in the region. The West- 2010 and 2017, public spending on agriculture ern Balkan regional market comprises more than averaged 0.27 percent of GDP. This compares to 20 million consumers, with a large diaspora locat- 0.72 percent in the EU, 1.27 percent in North Mace- ed in high-income countries. Albania could take donia (the highest in the Western Balkan region), more advantage of these two important markets and 0.51 percent in Bosnia and Herzegovina (the by strengthening the trade links with them, using second lowest in the region).61 Closing this gap existing mechanisms such as the CEFTA agree- can help reverse the trend on investment in re- ment, and cultivating relations with merchants of search.62 Albania’s increased focus on food safety Western Balkan products in the EU. Preferential and quality control is in line with the growing de- access to the Turkish market is also an opportu- mand for processed food and agri-food exports. nity to expand exports. Investing in agricultural While the economic impacts of direct support competitiveness has strong employment multipli- to farmers are not negligible, support allocated er effects. An input/output analysis finds that the under rural development programs (particular- agri-food industry is responsible (directly and in- ly farm modernization and food processing) has directly) for almost half the economy-wide jobs.59 double effect on increases in employment. Build- Investment in productive capital for farmers ing and/or strengthening farmer’s associations is key but needs to be accompanied by greater and cooperatives could also help with rural trans- knowledge and coordination among produc- formation amidst the fragmentation of small land ers. To export successfully, Albanian farmers need plots. Albania has few aggregation mechanisms, to sustainably increase their production volume unlike many countries in the EU, where small pro- and quality by modernizing their practices. Ag- 58 World Bank, Albania, Agriculture for Jobs and Growth (2018). 59 World Bank, Albania, Agriculture for Jobs and Growth (2018). 60 See World Bank, Exploring the Potential of Agriculture in the Western Balkans (2018). 61 See World Bank, Albania Agriculture Public Expenditure Review (2019). 62 Estimates suggest that closing a quarter of the R&D gap relative to EU-28 levels could increase agricultural productivity by 15 percent in Albania. 44 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 ducer associations and cooperatives play a criti- al and marine activity and address environ- cal role in linking smallholder farmers to finance, mental challenges. The “blue economy” (a sus- inputs and output markets. Traders and off-takers tainable and integrated economic development in provide aggregation services, but the lack of pro- healthy oceans) is an approach that promotes in- ducer groups inclines bargaining power towards clusive economic activity while ensuring environ- buyers, leaving smallholder farmers with the mental sustainability and cultural acceptability.66 smaller percentage of value added.63 Albania could adopt a blue economy approach to plan and implement policies to reduce pollution, Expanding fishing and tourism would con- preserve marine and coastal areas, improve their tribute to sustainable and spatially inclusive management framework to mitigate environmen- growth. The marine and coastal economy rep- tal risks, set boundaries for activity that respect resents a combined 40 percent of GDP, of which the ecosystem’s environmental limits, and ensure 0.2 percent comes from the fisheries sector (IN- that the country’s key tourism assets are most effi- STAT, 2014) with an estimated value of the sector ciently and sustainably used for the benefit of the of US$ 22 million, mainly from marine capture local people. The EU has pointed to the current fishery, while aquaculture adds about US$ 8 mil- policy gaps in marine and coastal management lion and mussel production about US$ 10 mil- and has called for policies to manage fisheries, lion. Both domestic and export demand can be solid and water waste, and to reduce marine pol- expected to increase in the future, but the sector lution. Albania’s preparations for reforming fish- currently faces uncontrolled, over-exploitation of eries management to meet the EU Acquis are still fish stock and low productivity.64 Meanwhile fore- at an early stage; although the Fisheries Strategy casts from the World Travel and Tourism Council for Albania was adopted in 2016, only a small frac- (WTTC) estimate that by 2028 tourism in Albania tion has been implemented so far.67 could generate US$ 2 billion, but this will depend on Albania’s ability to maintain a pristine coast, to Connecting infrastructure between urban connect the country’s coastal and maritime-based and rural sectors could support the devel- tourism with offerings inland, to attract more opment of agricultural exports and tourism. higher-spending environmentally and socially Despite Albania’s efforts to invest in public in- conscientious tourists and to further develop the frastructure and increase its capital stock, it still tourism supply in a sustainable way.65 has the largest infrastructure gap in the Western Balkans.68 A large swath of the country remains Adopting a “blue economy” development ill-connected with internal and external markets plan would enhance the sustainability of coast- 63 World Bank, Exploring the Potential of Agriculture in the Western Balkans (2018). 64 See FAO (2015). 65 See Annex 3: Strategic sectors for Albania’s export-oriented growth model for details on the tourism and agriculture sectors. 66 For example, reducing overfishing could potentially add more than US$ 80 billion to the global economy each year, more than 30 times the current net contribution of the fisheries sector. See World Bank, The Potential of the Blue Economy: Increasing Long-term Benefits of the Sustainable Use of Marine Resources for Small Island Developing States and Coastal Least Developed Countries (2017). 67 European Commission (2018)– Chapter 13 – Fisheries. 68 For instance, in 2017, Albania spent 2.4 percent of GDP in the transport sector, but it ranked 115 of 140 countries in road connectivity in the 2018 Global Competitiveness Index, and 100 of 140 in overall infrastructure (Atoyan, et al., 2018). Still, between 2014-2018, spending on roads focused on network expansion and upgrade investments. The road quality improved; shares of km in “good” and “very good” condition increased from 35 percent in 2014 to 60 percent in 2018. OPPORTUNITIES FOR PROGRESS 45 (Figure 15).69 Responding to the EU accession pro- regional level.73 Still, more than half of the coun- cess, the government has prioritized connecting try’s households lack access to commercial fixed the main economic poles in Albania with each broadband connectivity, and high-speed broad- other and with neighbor countries. For instance, band (≥30 Mbps) is available to fewer than 10 a joint railway station between Albania and Mon- percent of households.74 Broadband household tenegro was inaugurated in Tuzi, and Albania ap- penetration varies widely across regions; while in proved the Transport Community Treat to estab- Tirana penetration exceeds 70 percent, it drops to lish an integrated market in the transport sector 30 percent in all eastern counties and in the south. and enhance transport operations within the re- Improving connectivity between rural areas (ag- gion and with the EU.70 Regarding roads, the “core ricultural and natural) and the “core network” transport network” has been prioritized. Roads would reduce time and costs of transportation for are safer and the country has almost achieved its agricultural produce for export, and it would also target to reduce fatalities by 20 percent compared allow other non-agricultural activities to develop to 2014 by improving the effectiveness of road further (such as tourism). Supporting the capacity safety inspectors.71 Still, investment and mainte- of municipal governments to better plan, coor- nance of the rural road infrastructure is uncoor- dinate, and invest in maintenance of rural roads dinated and inefficient, as municipalities lack an would be an important step as these are local gov- integrated management strategy. Standards for ernment functions. In the long term, expanding design, construction and maintenance which are the rail network towards the southern and central used at the national level are not systematically parts of the country will also enable alternative adopted by municipalities, affecting quality. In transportation options for people and merchan- terms of digital connectivity, Albania has made dise, reducing congestion. Finally, expanding ac- significant effort to include digital infrastruc- cess to digital connectivity will be critical to allow ture as part of the Western Balkans Investment all sectors operating in rural areas to modernize, Framework (WBIF) facility and is the first country experience efficiency gains and create jobs. to take advantage of the available funding to de- Albania needs to implement more proactive sign its first rural broadband program.72 Albania urban planning policies that support the cre- is now part of the Balkans Digital Highway initia- ation and strengthening of dynamic, attractive tive that aims to strengthen digital connectivity and competitive cities. Local governments have through commercialization of fiber assets on the low capacity to conduct and implement territorial 69 The connectivity index shown in the figure is the sum of the road density and market accessibility indices (World Bank, Albania Vulnera- bility Index, unpublished, 2019). 70 The government is also implementing measures such as aligning and simplifying border crossing procedures, railway expansion and reform, information systems, road safety, and maintenance schemes. 71 That said, roads are still vulnerable to weather events and natural hazard. 72 The WBIF is a regional blending facility to support EU enlargement and socio-economic development in the Western Balkans by providing financing and technical assistance for strategic investments in the energy, environment, social, transport, private sector development and digital infrastructure sectors. In 2020 Albania aims to upgrade its major sectorial policies such a Broadband strategy and 5G strategy that should pave the way for the further advancement of its infrastructure. In November 2019 Albania’s energy regulator (ERE) has authorized the electricity transmission operator to commercialize its underutilized fiber optic assets thus providing important input into diversification, robustness and security of the national digital connectivity routes. 73 Gelvanovska-Garcia (2019). 74 AKEP (2018). 46 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 FIGURE 15: Connectivity index and road network Source: World Bank, Albania Vulnerability Index, unpublished Source: ASIG (2019) planning. Only 34 municipalities have approved tivity and attract investment in the different ur- territorial development plans. Most municipali- ban centers, creating better job opportunities and ties experience difficulties due to their inexperi- improving the quality of life in smaller cities. ence, lack of technical expertise and limited ac- The under-performance of the land admin- cess to immovable property registration data. In istration sector remains a critical constraint to some cases, borders with other administrative economic and territorial development. Since units is unclear, generating further problems. As the privatization process began at the start of the the General National Plan “Shqipëria 2030” states, transition, the land management sector has suf- government at all levels need to strengthen a larg- fered a lack of cohesive leadership, fragmented er system of interconnected cities and rural areas institutional arrangements, and an inconsistent with dynamic activity and good quality of life by policy, legal and regulatory framework. This has gradually and strategically investing in improv- created disincentives to invest in land, restricted ing key infrastructure and in primary healthcare, the development of a land market, and prevent- education, public transportation, and housing.75 ed the transition to a modern economy.76 During These investments would enhance economic ac- 75 Government of Albania (2016). 76 In 1991, the Law on the Land (No. 7501/1991) was passed to manage the privatization of ex-cooperative farmland. It established that land should be distributed to families that resided on the cooperatives. The ownership certificates (“tapis”) issued to each family, indicated the name of the household head, a list of parcels assigned to the household, their characteristics and the local names of the bordering OPPORTUNITIES FOR PROGRESS 47 this time the laws on the property privatization uses such as producing animal feed. A significant processes have been amended continuously to portion of agricultural land is thus not being used address problems as they were identified; often productively due to an ill-functioning land market times with lack of clarity, leading to further imple- and lack of access to capital.77 mentation challenges. Frequently, privatization Completing the implementation of a com- commissions issued various acts for the same prehensive land administration system is crit- plot of land. Agencies in charge of the privatiza- ical to secure lad property rights and conduct tion process were constantly restructured, de- proper urban planning. To address the capacity cisions were not documented creating scope for problems and the lack of a coordinated approach errors and malpractice. In short, the mismanaged between agencies, the new Cadaster Law defines privatization process led to many legal disputes the rules for the establishment, organization and that continue to the present day. Moreover, the functioning of the new State Agency of Cadaster, quality of immovable property data is low, which as the state institution responsible for the admin- weakens property rights and the development istration of the immovable property register as of healthy and transparent real estate markets. well as for the completion of the outstanding land Approximately 80 percent of private properties privatization processes. In addition, an e-Gate- in Albania are registered, but their records exist way, managed by the National Agency for Infor- only in paper format. The mapping records are mation Society (AKSHI), operates as a single point often in poor physical condition, complicating of access to various government datasets and maintenance. The share of properties registered services. Positively, during 2017, the immovable and held in digital format is still very low. Regis- property registry (IPRO) accepted approximately trations have continued largely in analogue form 300,000 applications for transactions. Approxi- until 2019. The shallow markets for agricultural mately 50 percent of the applications concerned land sales and rentals have obstructed the pro- a group of nine services. A pilot in Tirana began to cess of land consolidation especially in remote complete all applications that fell into these cat- areas with higher land fragmentation and high egories within 24 hours, a system known as “Fast orientation to livestock activities, where rented Track.” land is used almost exclusively for short-turnover parcels. The local cadaster offices then archived the “tapi”. This led to over 300 thousand new properties which resulted in high land fragmentation. However, the Land Law did not recognize the land ownership rights as they existed prior to collectivization. This caused resentment on the part of pre-1945 owners and eventually led to a Law on the Restitution and Compensation of Properties of Ex-Owners (Law No. 7698/1993), which allowed recognition in some areas for ex-owners or compensation with alternative parcels of land. The trust on the validity of the new titles was low because of frequent overlaps with titles issued before WWII (pre-collectivization) and the slow process of addressing disputes. See Zhllima, Imami, & Rama (2019) and World Bank, Albania: Status Review of the Immovable Property Registration Office now superseded by the State Cadaster Agency (ASHK) Services and Data Quality (2019). 77 Deininger et al. (2012). 48 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 STRATEGIC OBJECTIVE 3: ENHANCING SOCIAL AND ECONOMIC INCLUSION earnings, but the overall quality of jobs remains low. Over 30 percent of jobs are informal, prevent- ing workers from joining the pensions system and benefiting from the protection of formal jobs. The share of self-employed (34.9 percent of total em- ployment) is the highest in the region.78 These la- bor market outcomes partly reflect the structure of Albania’s economy – low-productivity agricul- The Albanian social contract needs to be rein- ture continues to absorb close to 40 percent of forced to ensure that the poor and vulnerable total employment, while manufacturing and ser- have more opportunities to prosper. At 38 per- vices are underdeveloped.79 Moreover, the social cent of the population in 2017, Albania’s absolute contract—that is, the institutional arrangements poverty (measured at US$5.5 per person per day, to protect the most vulnerable and to foster equal in PPP) is still high by UMIC and ECA standards. opportunities—is not sufficiently strong and effi- Despite the decline in poverty between 2014 and cient to ensure that people fulfill their potential 2015, the headcount in 2017 is comparable to that while providing sufficient protection to those that from a decade earlier. The modest progress ob- cannot participate in the labor market, including served between 2014 and 2015 resulted mainly the growing aging population. from job creation and to a lesser extent by higher 78 World Bank & WiiV, SEE Jobs Gateway Database (2020). 79 INSTAT, Employment by administrative source and agriculture sector (2017). STRATEGIC OBJECTIVE 3: ENHANCING SOCIAL AND ECONOMIC INCLUSION 49 MAIN CHALLENGES percentage points below the EU28 average. The drivers of inactivity are different among men and women: nearly one-third (31.6 percent) of eco- nomically inactive women carry out domestic re- sponsibilities, compared with only 2.1 percent of men, and over half (53.1 percent) of the men who are economically inactive are students (against 29 percent of women).81 As a result, elderly women Low wages and low real wage growth limit the are at risk of vulnerability because they have less potential of jobs to improve living standards. pension income and assets and have higher rates In 2018, the average remuneration rate of Alba- of becoming widowed (48 percent) compared to nian workers in the formal sector was EUR 853 men (11 percent). Among those who work, wom- per month, adjusted for purchasing power parity en are overrepresented in unpaid family work (23 (PPP). Despite a real growth rate of 2.1 percent per percent, compared with 12 percent among men) year between 2014-2018, it remains the lowest in and concentrate in opposite ends of the occupa- the Western Balkans (where the average was EUR tional spectrum: either formal, professional occu- 1,167). Consequently, labor earnings have now pations, or in agriculture, informal, and low-skill less impact on poverty reduction compared to the jobs. A gender wage gap of roughly 15.2 percent period before 2008, when real wages grew at close exists in favor of men, even after one controls for to 10 percent per year on average, which contrib- education, experience, and other characteristics. uted to a faster poverty reduction. A new law to Occupational segregation, dependent children, promote the employment of unemployed job- and missed work experience are among the factors seekers was adopted in April 2019 to provide spe- that increase the gender wage gap. There are gaps cialized services, including counselling and career in entrepreneurship as well. Only 11.7 percent of guidance, intermediation services and training, Albanian firms have women managers, and only with priority given to vulnerable groups. However, 12.5 percent are owned or co-owned by women. the budget for employment services and promo- These shares are well below regional averages. tion is only 2.6 percent of total social protection Other groups also suffer from economic and spending (including social security).80 social exclusion. Youth and minorities are dispro- Women face significant gaps in access to portionately excluded from the labor market. For economic opportunity. The employment gender instance, 27 percent of youth are not in education, gap in 2018 was 14 percentage points in favor of employment or training (NEET), and unemploy- men for ages 15–64, and 17 percentage points for ment among youth is 2-3 times higher than for the labor force participation. In 2018, 60 percent of adult workforce. Exclusion from the labor market Albanian women were economically active, the may lead to social exclusion, as suggested by in- highest participation rate since 2011 but still 9 ternational evidence.82 In Albania, a high share of 80 Fostering stronger labor demand is a crucial endeavor, and the country needs to expand job creation in non-traditional sectors, for instance E-commerce (which has spillovers in areas such as digital marketing and logistics). 81 This difference also reflects the fact that most inactive men are below 25 years old. In contrast, inactivity is only about 10 percent among men 25 to 54, against 25 percent for women in the same group. 82 See OECD (2016) and Henderson, Hawke, & Chaim (2017). 50 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 the prison population are youth (37 percent) and Despite the large Albanian diaspora and cur- there is high fertility among young women 15-19 rent level of remittances, these private trans- (14.5 births per 1,000 women, compared to 10 in fers could decline in the future. Although the EU). Despite significant progress in the protection massive out-migration seen during the 1990s and of rights of LGBTI people, a large majority of them early 2000s has decreased significantly and con- are systematically discriminated from access to tinues to fall (in 2018, 39 thousand people emi- work opportunities, health services, housing, and grated, against 46 thousand in 2014), the Albanian obtaining police and justice services.83 For exam- diaspora living abroad represents close to a third ple, 10 percent of LGBTI people have forgone nec- of all Albanians and 40 percent of those still liv- essary medical treatments because of fear of dis- ing in the country (Figure 16). For years, the Alba- crimination. Almost on third (29 percent) of LGBTI nian diaspora has maintained strong links to the people in Albania have been a victim of violence, country, and remittances represent an important with 25 percent of that violence originating with- source of income support for many households in in the family/household. Only 11 percent of the Albania. Thus, many households have come to rely victims reported their case to the policy, mostly on private transfers from relatives home or abroad stating fear of homophobic and/or transphobic re- rather than from public redistribution of resourc- action from the police.84 Disabled people (who rep- es via taxation and social spending. However, the resent about 2.5 percent of the adult population) diaspora’s links to Albania will become weaker as face barriers to access education, and have a low family ties diminish, and private transfers will con- labor force participation (34 percent, against 55 tribute less to household income, which could put percent in total population), while disability ben- more pressure on public social programs. efits—which take a large share of social assistance Moreover, demographic change will in- spending—do not reach the most needed bene- crease the pressure to shift resources towards ficiaries.85 Roma and Egyptians (who represent older generations. Once considered a young around 3 percent of the population) have very low country, Albania has seen its population growth enrollment in basic education (66 percent of chil- fall into negative territory and the composition of dren 7-to-15, compared to 96 percent of non-Ro- families change since the second half of the 1990s ma), only 18 percent are employed (against 56 per- when massive out-migration took place as a re- cent nationally), and only 27 percent have health sponse to economic hardship. During the 2000s, insurance (45 percent for non-Roma).86 They also despite better economic performance, popula- suffer exclusion from social programs because of tion growth has been consistently below zero. inflexible eligibility rules. This is the combined result of net out-migration 83 In the last decade, the Albanian government has passed some of the most progressive LGBTI protections in the Western Balkans. In 2013, Albania reformed its criminal code to incorporate SOGI into existing hate crime and hate-speech laws. In 2015 the government of Albania held the biggest consultative meeting on LGBTI rights for the action plan for non-discrimination of LGBTI people 2015-2020. A Commis- sioner for Protection from Discrimination was appointed for a 5-year term to examine complaints, monitor the status of discrimination, and issue recommendations. However, LGBT progress goes beyond legal reforms. Discrimination and marginalization of LGTBI or ethnic minorities also reflect insufficient access to social and legal services, and insufficient efforts to encourage the public visibility of LGBTI individuals (UK Home Office, 2019) and (Bertelsmann Stiftung, 2018). 84 World Bank Group. 2018. Life on the Margins: Survey Results of the Experiences of LGBTI People in Southeastern Europe. World Bank, Washington, DC. 85 See World Bank, Albania Social Assistance Modernization Project additional financing (2018). 86 Robayo-Abril & Millán (2019) MAIN CHALLENGES 51 FIGURE 16: FIGURE 17: Stock of emigrants by destination, 2017 Population pyramid by gender, 2020-2050 Source: Authors with data from UN Population Division (2017) Source: Authors with data from UN Population Division (2019) 100+ 39% 90-94 80-84 28% 16% 70-74 60-64 11% 50-54 15% 40-44 11% 30-34 2% 3% 2% 2% 20-24 10-14 % total nationals % local population 0-4 United Kingdom Other W. Europe North Macedonia -10% -5% 0% 5% 10% United States Greece Italy Males, 2050 Females, 2050 Males, 2020 Females, 2020 FIGURE 18: FIGURE 19: Share of Albanians saving money regularly Share of Albanians saving for old age Source: Authors with Global Financial Inclusion Database Source: Authors with Global Financial Inclusion Database (2019). (2019). Saved any money in the past year (% age 15+) Saved for old age (% age 15+) 80 45 70 40 60 35 50 30 25 40 20 30 15 20 10 10 5 0 0 BIH ALB MNE SRB MKD XKX HRV LVA LTU SVK EST SVN BIH ALB MNE XKX MKD SRB LVA HRV LTU EST SVN SVK WB6 EU28 WB6 EU 2014 2017 2014 2017 52 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 and a below-replacement birth rate of 1.71 chil- nancial Inclusion Database, on 2017 only around dren per woman. In 2014, close to 36 thousand one in four adults in Albania saved any money in babies were born, but this number had declined the year prior, and this share had decreased since to 29 thousand by 2019 (INSTAT), and this trend 2014 (Figure 18). The share is also the lowest in is more pronounced outside of the Tirana-Durres the region after Bosnia and Herzegovina, and less prefectures. Population projections show that by than half of the share in countries like Estonia, 2050 half of Albania’s population will be over 50 Lithuania, Slovakia or Slovenia, where over 60 years old (Figure 17). Internal migration within percent of adults saved in the last year. Even few- Albania is also changing the demographic land- er people use bank accounts actively. More impor- scape and making the areas outside of Tirana and tantly, only around 9 percent of adults save any Durres older as a result of the low birth rates and money for old age (Figure 19), again the lowest af- the migration of working age adults. Inevitably, ter Bosnia and Herzegovina and about four times this demographic change will shift public and pri- below the countries above. In a context of aging, vate resources from the young to the old, as these this means that as adults reach old age, their sav- become more numerous. It is then important to ings base will be insufficient to generate retire- understand how Albania can renew its social con- ment income, and younger generations will have tract to reduce poverty faster and to ensure that to bear the burden of supporting the old though higher living standards for the future Albanian non-contributory pensions. However, as the population are sustainable. working-age population declines, it will become harder to finance such schemes and they will take Despite the aging trend, too few Albanians place at the detriment of other investments. are saving for old age. According to the Global Fi- MAIN CHALLENGES 53 OPPORTUNITIES FOR PROGRESS marks and goals to drive system improvement and efficiency in light of declining school-age population. Recently, the preschool finance sys- tem shifted to a per-student allocation, to bring the ratio of students per teacher to a maximum of 18, which should reduce overcrowding and in- crease the quality of education for this group. Greater access to quality primary health care Investing efficiently in education is critical to is needed to reduce health risks diminishing enhance economic inclusion. The fact that 70 the quality of human capital, especially among percent of the poor live in households where the the poor. As discussed above, child malnutrition head has lower secondary education or less indi- and anemia are relatively high nationally and cates that insufficient investment in skills reduces also more prevalent in poorer prefectures, and the probability to exit poverty. Low skill accumu- the quality of health services is also lower there, lation is in part the result of underinvestment in where people report making frequent informal early childhood development (including nutri- payments, especially among the poor and ethnic tion and education) that decreases the ability, minorities. The risk of premature death from four especially among the poor, to fully develop their major noncommunicable diseases (NCD) for ages productive potential in adult life. Overall public 30-70 was 20.7 percent for men and 13.1 percent spending for education is low. It reached 3.1 per- for women in 2016.88 Morbidity and disability risks cent of GDP in 2017 (compared to 5 percent on from NCDs have strong negative impacts on pro- average in the OECD), still far from the 5 percent ductivity. To improve adult survival and ensure a target, and pre-university education spending healthy and productive aging, Albania needs to was only 2.31 percent of GDP.87 Per-student ex- invest in prevention, emergency services and spe- penditure is among the lowest in Europe across cialized care. The government’s national health all levels of education. In 2017, per student expen- strategy, adopted in 2017, aims to establish uni- diture as a percentage of GDP per capita was 12.5 versal healthcare coverage.89 percent for preschool and basic education (Grade For women, expanding childcare services 1-9) combined, against the EU28 average of 20.2 would facilitate labor market participation. percent for pre-school, 21.5 percent for primary Low availability of early childhood education and and 25.7 percent for lower-secondary. Expendi- care among children aged 0-3 in Albania reflect ture per student in upper-secondary (general and the limited working time available among par- vocational) reaches 14.9 percent of GDP per capi- ents, particularly women. Only 10 percent of chil- ta, against the EU28 average of 25.2 percent, while dren ages 0–3 have access to organized day-care per student spending in tertiary is 13.6 percent, or crèche services, and preschool enrollment, less than half the EU28 and OECD averages of 28 although it has increased, is lower in rural areas. percent. More importantly, education financing is Furthermore, although the enrollment rate in pre- still largely input-based, with no national bench- 87 UNICEF (2019) 88 World Health Organization (WHO) (2018). 89 European Commission (2019), p. 92. 54 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 FIGURE 20: FIGURE 21: Incidence of Ndihma Ekonomike by welfare Overall coverage of Ndihma Ekonomike decile Source: INSTAT Source: Authors based on HBS data Coverage, 2016 Families covered 20 100.000 78,071 80,057 80,147 80,945 80.000 61,000 15 60.000 53,982 % population 40.000 10 20.000 - 5 2014 2015 2016 2017 2018 2019 0 1 member 2 members 3 members D1 D2 D3 D4 D5 D6 D7 D8 D9 D10 4 members 5 members 6 members Welfare decile over 6 members school education of children ages 3-5 is high in Social assistance is important to comple- Albania (86 percent), participation is significantly ment the income of poor households, but its higher among households from higher socio-eco- coverage and efficiency to reach the most nomic status and in urban areas. In Albania, most vulnerable could improve. Social assistance childcare needs are covered by household mem- spending increased steadily until 2014 and has bers, particularly women. These barriers affect remained roughly constant, but it remains the not only the supply of labor, but also the demand lowest (as a share of GDP) in the Western Balkans for women’s labor: evidence from a survey of em- after North Macedonia. Social assistance trans- ployers in several countries of the Western Balkans fers (poverty and disability benefits) accounted shows that a large share view women’s competing for only 12 percent of poor households’ income in family obligations as an issue in hiring women (48 2017, below the average for upper-middle income percent of employers in Albania and 27 percent in countries and below all Western Balkan neighbors Serbia). The limited access to childcare generates and Croatia.90 Among the components of social a vicious circle of low labor market attachment assistance, disability benefits drove the increase, and the prominence of the care provider role that peaking in 2014, when 16.7 billion lek were spent leads to increased vulnerability and gender-based on disability (79 percent of the total social assis- inequalities. tance budget), with a slight decrease in 2015 and 2016. An increasing share of disability benefits 90 See ASPIRE (2019). OPPORTUNITIES FOR PROGRESS 55 went to work invalids, who in 2015 received close ployment Services, and additional 648 people to half of the benefits, whereas the disabled and enrolled in vocational training courses through their caregivers have seen their share decline. The the newly approved Employment Promotion government is planning to implement a social Program. Activation support coverage is still model for disability assessment.91 It has conduct- very low, but the government plans to expand ed a pilot of the new assessment methodology, it, including providing more attention to wom- developed a monitoring system and approved en. At the same time, at the local level social legislation for scaling the reform. However, the care services are undeveloped and insufficient model still needs to be strengthened before it can to connect the poor with the services available. effectively cover the most vulnerable disabled Although local governments have the responsi- people. The coverage of the main poverty allevi- bility to assess needs, plan and provide social ation program, Ndhima Ekonomike, should also care services, almost half of them lack the ca- increase. Only 18 percent of households in the pacity and experience to implement them.94 For poorest decile were covered in 2016 (Figure 20) instance, municipalities lack data on basic wel- and spending remained at around 4.4 billion lek fare outcomes to design and deliver the appro- between 2011 and 2016.92 Recent reforms to tar- priate social services. Social housing needs are geting of Ndihma Ekonomike to improve eligibil- unmet (about 30 percent of excess demand on ity criteria and deliver the cash transfer to wom- average). Vulnerable groups such as victims of en in the household, resulted in lower coverage domestic violence have little support in terms in 2018, although it has increased more recently of sheltering and access to health and legal ser- (Figure 21). Because of the reform, the generosity vices. Similarly, the country has only one shelter of the program increased by 17 percent between for LGBTI people which begun recently receiving 2017 and August 2019. The government is work- financial support for the government.95 People ing to strengthen economic assistance, although with disabilities rarely find municipal services more analysis is needed to determine if recent re- for care and rehabilitation. Finally, young peo- forms are reaching those most in need.93 ple receive little support for accessing job and The provision of activation and social care training opportunities, which encourages them services needs to be strengthened. Active la- to migrate to larger urban areas. bor market programs are starting to connect Fiscal policy and administration, particu- beneficiaries of social assistance with the labor larly taxation, could have more ample redis- market. In 2018, close to 4,000 beneficiaries of tributive effects. Few Western Balkan countries social were employed through the National Em- apply progressive personal income taxation, 91 The reform aims to transform the medical assessment into a bio-psycho-social assessment to reflect the new concept of disability as an interaction of functional impairments caused by a disease with psychological and social factors. 92 A caveat is in order, as the HBS, is not designed to be representative of NE beneficiary population. In 2016, the HBS captures even a lower NE coverage than previous years. According to HBS 2016 the overall NE coverage is 5.4 percent compared to the actual coverage measured based on administrative program data of 10.5 percent in the same year, about half of the actual coverage. Hence any statistics derived from the HBS have limited reliability. The simulations on matching program MIS administrative data with the national distribu- tion of consumption based on HBS 2016. 93 Council of Ministers (2019), p. 121-123. 94 European Commission (2019). 95 http://strehalgbt.al/ 56 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 among them Albania (with a top marginal rate system is undermined by the weak tax collection of 23 percent), North Macedonia (top rate of 18 of the state due to significant informality and in- percent), and Kosovo (top rate of 10 percent). Be- come under-reporting. For instance, less than 18 cause most revenue collection relies on indirect percent of adults have formal wage employment, taxes, fiscal policy—both taxation structure and which means that the base for personal income government transfers—tends to have relatively taxation is very small. Likewise, VAT collection is limited redistributive effects in Albania.96 Direct about 10.4 percent of final consumption (2017), taxation reduces inequality only at the margin: half of the potential revenue. And a system of pri- the Gini coefficient falls from 0.37, measured at vate transfers (remittances included) represents income plus pensions, to 0.35 for consumable about half of the income share of public transfers income (subtracting all taxes and contributions for the bottom 40 percent, suggesting that pri- and adding direct transfers). But taxation as a vate transfers are also an important redistributive whole, especially the VAT, has a small poverty-in- mechanism, although they are not targeted to the creasing effect that is not sufficiently offset by di- most vulnerable. rect social transfers. Moreover, the redistribution 96 Davalos, Robayo, Shehaj, & Gjika (2018). OPPORTUNITIES FOR PROGRESS 57 POLICY PRIORITIES clean energy efficiently, equitably, and in a sustain- able manner; (4) formalizing and enhancing the in- clusiveness and sustainability of the land market; and (5) enhancing governance, transparency, and the accountability of government toward citizens). Four priorities were grouped as supporting or amplifying the impact of the top five priorities over the longer run (increasing the quality of labor The evidence presented in the Update, com- market engagement; improving the quality and rel- bined with internal and external consultations, evance of the education system and skills training; resulted in the identification of five key policy improving efficiency, access and quality of public priorities to achieve the Strategic Objectives services delivery; and ensuring more inclusive ac- for Albania’s development outlined above.97 cess to financial markets). Finally, three priorities The country has undoubtedly seen positive in- were considered critical to enhancing the eco- stitutional, economic and social developments nomic, social, and environmental sustainability of since the SCD was presented in 2015. At the same the top five priorities and the overall reform agen- time, while legal frameworks have moved for- da (enhancing the effectiveness and efficiency of ward to address key constraints to achieve pover- social protection systems for the benefit of vulnera- ty eradication, shared prosperity, and accelerate ble groups; ensuring the sustainable use of natural progress to reach high-income status, in practice resources and the stewardship of the environment; most still need to be fully implemented. The Up- and improving the quality and equity of health ser- date revisits the policy priorities presented by the vices and reducing health-related financial risks). SCD and organizes them with the lens of the three This SCD Update revisits these priorities Strategic Objectives described above, based on and organizes them around 5 policy areas con- the most recent evidence available, on internal sistent with the 3 Strategic Objectives. The in- and external consultations, and in alignment with sights from recent evidence analysis and internal the EU accession process. Similar to the SCD, the and external consultations helped to re-examine Update also considers as pre-conditions for devel- the SCD’s proposed priorities in light of the cur- opment the consolidation of institutional quality, rent trends undergoing in the country and the EU economic stability, and a sustainable use of natu- accession process. For the most part, given the ral resources. slow progress in the implementation of reforms The SCD identified 12 sectoral priorities of (despite more favorable external conditions) the which five were fundamental. The five policy priorities put forth by the SCD remain valid. In areas fundamental for reaching the twin goals in line with the organization of the Update’s analy- Albania and having direct impact both on com- sis around the 3 Strategic Objectives, the Update petitiveness and inclusion were: (1) restoring fiscal proposes to reorganize these priorities by group- sustainability and financial stability; (2) establish- ing them around specific outcomes that would ing a high-quality business environment that pro- contribute to reaching the Strategic Objectives. In motes firm growth and job creation; (3) providing doing so, the Update highlights the cross-cutting 97 See Annex 6: SCD Update consultations. 58 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 nature of the policy outcomes needed to achieve contribute the most to inclusion). Additionally, the Strategic Objectives, and the importance of three policy areas address the pre-conditions for policy coordination both horizontally and verti- development of institutional quality, economic cally across government levels. These goals are stability, and a sustainable use of natural resourc- also in line with the EU acquis chapters. The Up- es, also identified as fundamental by the SCD. The date identifies 5 policy areas that directly contrib- relation between the SCD and the Update’s pro- ute to growth and inclusion (the first three critical posed priorities is presented in Table 1. to increase competitiveness, while the last two TABLE 1: Relation between priorities, pillars and foundations Priority policy areas in the Priorities from the 2015 SCD (F=Fundamental; S=Supporting; E=Enhancing) 2019 SCD Update Fostering competitive Establishing a high-quality business environment (F) markets. Enhancing governance, transparency and accountability of government (F) Improving inclusiveness of access to financial markets (S) Improving efficiency, access and quality of public services delivery (S) Enhancing efficient Improving quality, access and relevance of education and training systems (S) investment in human Improving quality, efficiency and equity of health services (E) capital. Upgrading infrastructure, Providing clean, efficient, equitable and financially sustainable energy sector (F) improving disaster Improving efficiency, access and quality of public services delivery (S) resilience and energy Ensuring sustainable use of natural resources and stewardship of the diversification. environment (E) Strengthening the capacity Improving efficiency, access and quality of public services delivery (S) of local government Restoring fiscal sustainability and maintaining financial stability (F) to raise revenues and Enhancing governance, transparency and accountability of government (F) deliver services. Strengthen the Enhancing effectiveness and efficiency of social protection systems (E) redistributive efficiency Increasing the quality and inclusiveness of labor market engagement (S) of the state. PRE-CONDITIONS Strengthening rules-based Enhancing governance, transparency and accountability of government (F) government. Establishing a high-quality business environment (F) Formalizing and enhancing inclusiveness and sustainability of land markets (F) Achieving a stable Restoring fiscal sustainability and maintaining financial stability (F) and transparent macroeconomic environment. Strengthening protection Ensuring sustainable use of natural resources and stewardship of the of natural resources. environment (E) POLICY PRIORITIES 59 Fostering competitive markets. A competitive cation services is critical to increase human capi- and high-quality private sector is the econom- tal of the workforce to access better jobs and im- ic basis for integrating into the global economy, prove quality of life. The first major challenge is to creating job opportunities across the territory secure the nutritional and cognitive development of Albania and generating broad-based devel- of all children before they reach school-age. The opment that benefits all. This calls for removing attention to basic education needs to be com- unnecessary barriers to entry, exit, and operation plemented with a push to increase completion of companies, and maintaining a level playing of upper secondary and build market-relevant field for all companies. A business-friendly and skills that accompany the transformation of the predictable legal environment that encourages economy. In education, higher investment must long-term investment decisions is critical. Firms be accompanied by measures to increase efficien- need broader access to production inputs, in- cy, including introducing assessment of primary cluding a skilled workforce, finance as well as a school readiness, scaling-up and increasing the high-quality infrastructure connecting business- relevance of teachers’ pre-service teacher training es with markets. A deeper and more diversified and professional development, introducing mod- financial sector is needed to meet the varying ern methods to evaluate teachers, and expanding needs of businesses and the population. By devel- the shift to per-student funding to all pre-univer- oping and implementing a sound innovation and sity education. Encouraging the development digitalization policies through providing access to of entrepreneurial mindset, especially among funds, technical assistance and knowledge, the women, technological awareness and knowledge government can encourage firms to remove inef- of foreign languages would help raise the poten- ficiencies in downstream value chains, encourage tial of the domestic private sector to modernize, new business models such as e-commerce to inte- increase productivity and compete globally. Ad- grate better with regional and global value chains ditionally, expanding access to lifelong training and upgrade managerial skills and processes.98 A would ensure that all workers maintain market- more developed digital economy would offer new able skills as the economy changes. A strong pri- opportunities for women’s labor force participa- mary health care is necessary to ensure that chil- tion, with a flexible work model that allows for dren grow healthy, that adults have easy access more balance between professional and family to preventive care and that people with chronic engagement. In the agricultural sector, investing conditions receive services that require strong co- in capital upgrading and knowledge should be ordination and continuity. Shifting some services accompanied by introducing aggregation mech- to day and outpatient care and implementing the anisms to link producers to finance, inputs and hospital master plan will improve efficiency, qual- output markets.99 ity and outcomes for patients. Recruitment, train- ing and retainment practices for health staff with Enhancing efficient investment in human critical skills, especially for areas where shortages capital. Upgrading the quality of health and edu- are more severe require a joint effort with the ed- 98 Digitalization defined as the use of digital technologies to change a business model and provide new revenue and value-producing op- portunities. 99 For instance, in the United States, broadband has been associated with a 4.1 percentage point increase in employment among married women, as a result of Internet use for teleworking, which facilitates the work-family balance. (Dettling, 2017). 60 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 ucation sector.100 Strengthening the capacity of involves a closer coordination between the na- local governments would be part of the strategy tional water agency and the water utilities man- to provide quality services, and the government aged by municipalities. Upgrading and integrat- can also use social assistance programs to pro- ing the network and making utilities financially mote demand for human capital services among viable is a first step to reducing revenue losses. the most vulnerable. Upgrading the irrigation and drainage system is crucial to support sustainable agricultural pro- Upgrading infrastructure, improving disaster ductivity growth. Finally, ensuring climate and resilience and energy diversification. Electricity disaster resilience of Albania’s infrastructure is a access has become more reliable and power losses priority. 102 The first step is to clarify the roles and in the distribution network have declined. Yet, the responsibilities of the National Agency for Civil system remains vulnerable to years of low rainfall, Protection and the municipalities in accordance leading to hydropower production falling short to their capacity to plan, finance, and implement of domestic demand and the need to resort to response plans. Further, fiscal resources should expensive energy imports. Continued infrastruc- be available to be deployed for disaster risk man- ture upgrading to reduce distribution losses, di- agement and response, given that the frequency versification of the energy base towards solar and of climate-related events is estimated to increase. gas, as well as the use of financial instruments to buffer financial shocks from hydropower, all need Strengthening the capacity of local govern- to be further developed. Energy diversification in ment to raise revenues and deliver services. To Albania would support the EU’s energy transition reduce spatial inequality of services and opportu- project and attract investments in low-carbon in- nities it is critical to enhance the capacity of the dustries.101 Improving connecting infrastructure is local governments at all levels, including their also critical, particularly, supporting the capacity accountability towards communities. National of municipal governments to better plan, coordi- and local governments also need to implement nate, and invest in maintenance of rural roads. In more proactive urban planning policies that sup- the long term, expanding the rail network towards port growth of dynamic and connected cities. the southern and central parts of the country will However, local governments have low capacity to also enable alternative transportation options for conduct and implement territorial planning and people and merchandise, reducing congestion. only 34 municipalities have approved territorial Expanding access to digital connectivity is also development plans. Most municipalities struggle critical to allow all sectors operating in rural areas to implement territorial plans due to their inexpe- to modernize and create jobs. Increasing the ca- rience and limited access to immovable property pacity of municipal governments to improve wa- registration data. The challenge in larger urban ter management and delivery infrastructure is key centers like Tirana is to work towards develop- to ensure the sustainability of the resource. This ment of a competitive platform that benefits from 100 Adhami A., Çela D., Rrumbullaku L. (2013) (Grobler, et al., 2009) 101 The European Green Deal plans to take EU countries to produce net zero CO2-equivalent emissions and achieve climate neutrality by 2050. To this end, EU countries need to transform energy, transport, agriculture and environmental services. Albania will be drawn into this policy given it is negotiating EU accession. The country is in a relatively strong position regarding energy but there will be a need for fundamental change in approach for many other sectors of the economy. 102 See Xiong & Xavier (2019). POLICY PRIORITIES 61 the economies of agglomeration, reduces conges- inactivity. Finally, reducing informality by bring- tion, and provides adequate services for house- ing more people and businesses to contribute to holds and business, including public transporta- public redistribution is the only sustainable way tion, housing, connectivity, etc. Government at all to ensure a more equitable society, but this can levels needs to strengthen a “polycentric” urban only happen if the taxation and redistribution sys- development model by gradually and strategical- tems are transparent and accountable. ly investing in improving key infrastructure and in Finally, the Update also proposes three pol- primary healthcare, education, public transporta- icy areas to address the pre-conditions and the tion, and housing. These investments would en- sustainability of economic and social gains. hance economic activity and attract investment First, a predictable and transparent exercise of in the different urban centers, creating better job the rule of law lies at the heart of modern market opportunities and improving the quality of life in economies and inclusive societies. Government smaller cities. A variety of tools can be developed institutions should have clearly defined and com- and implemented to foster an improved local plementary—not overlapping—functions; and government capacity. These can include: greater checks and balances need to be in place at all taxation powers, transfers from the center condi- levels. Second, the gains that have been made in tional on results, collaboration among local au- restoring fiscal sustainability since 2014 need to thorities to develop and adopt best practices, etc. be protected and enhanced to enable the govern- A review and adjustment of the competencies of ment to devote the resources needed to invest in local administrations in view of the available re- enhancing competitiveness and boosting oppor- sources is in order. tunities for the most vulnerable, while avoiding Strengthening the redistributive efficiency of new crises that can set development back. Third, the state. Albania needs to strengthen an inclu- Albania’s natural resources, including water, for- sive growth model by increasing the efficiency in ests, and the precious coastlines need a more pro- the use of public funds, especially to address in- active management to directly increase the sus- equality. This implies attention to several areas, tainability of the sectors that rely on them, among including (a) increasing the progressivity of the others energy, agriculture, fishing, tourism, and tax system and fighting tax evasion; (b) improving mining. They also affect overall productivity— targeting and adequacy of social assistance and think for instance of air quality—and are key to disability benefits; (c) reducing barriers for wom- mitigate the risks caused by climate change. en to participate in labor markets, for instance by Strengthening rules-based government. Alba- providing child- and elder-care services; and (e) nia’s policies and regulations need to be designed proactively reducing discrimination of margin- and implemented more consistently and trans- alized groups such as Roma and Egyptians, and parently across all government institutions. This LGTBI people. The integration of social assistance requires a more efficient and transparent courts’ and activation services is crucial to ensure that system, which can improve the business envi- people have a chance to access income generat- ronment and can facilitate resolution of civil and ing options that can sustainably lift them out of administrative disputes. The government needs poverty. Additional efforts are needed to ensure a to continue to pursue justice reform by strength- smoother transition from school to work for young ening monitoring and reporting mechanisms, ac- people, to reduce high youth unemployment and 62 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 celerating the pace and enforcement of case res- high NPLs that plague the banking sector. The still olutions, and investing more in training and court significant external imbalances need to be tack- infrastructure. This also includes the need to led by growing the domestic export base, while improve the transparency and reliability of land continuing to improve Albania’s attractiveness for markets by increasing the certainty of land titles, foreign financing. which requires an acceleration in the digitaliza- Strengthening protection of natural resourc- tion of national property registry, the finalization es. Critical challenges today include high coast- of the legalization and privatization process, and line pollution, an inefficient use water resources, the resolution of disputes related to the privatiza- and the loss of forest cover, in part as a result of tion process. Finally, this includes reinforcing the energy needs. Mismanagement of these resourc- fight against corruption and organized crime, re- es undermines the development of the country ducing transactions costs by increasing trust and in the short-and long-term. Current challenges increasing the effectiveness of public policies at emerge from inadequate, incomplete regulations all levels of government. The capacity of institu- and weak enforcement. A successful strategy to tions and to formulate and implement policies address these issues requires strengthening local and regulations consistent with the principle of a government capacity, as most of these functions rules-based government depends strongly on the are now municipal responsibility. This effort needs quality of public sector officials. Albania needs to be led by the national government in partner- to continue the process of professionalization of ship with local governments and key stakeholders public sector workers, by strengthening the ap- in the private sector and the communities. Ad- plication of selection and evaluation rules and dressing these gaps is urgent as pressure on these by expanding access to training for public sector resources will only grow. For coastal develop- workers. ment, adopting a “blue economy” development Achieving a stable macroeconomic envi- plan would ensure the sustainability of coastal ronment. Namely, there is further scope for in- and marine activity and address environmental creasing the domestic mobilization of revenues, challenges, to avoid a rapid resource degradation strengthening the effectiveness of budget spend- from pollution, overfishing, and over-construc- ing and tackling off-budget fiscal risks. Financial tion on the seashore. The “blue economy” strate- sector stability needs to be strengthened, includ- gy is consistent with the EU Acquis in the fisheries ing through continued winding down of the still sector, which Albania has not yet developed. POLICY PRIORITIES 63 ANNEX 1 boosted domestic consumption and capital ac- cumulation, creating large employment gains in construction and services, but generating little productivity growth. Poverty fell during the peri- od thanks to strong real wage increases, and to a lesser extent pensions, remittances and social transfers. At the same time, domestic demand caused the trade deficit to grow. As the global MAIN FINDINGS AND PRIORITIES crisis unfolded, Albania’s export volumes, remit- IDENTIFIED BY THE FIRST- tances, and financial flows diminished sharply, GENERATION SCD “NEXT and the country avoided a recession by resorting GENERATION ALBANIA” to fiscal policy. Public sector debt grew up to 70 percent in 2014, generating high interest costs, The SCD analyzes the evolution of Albania’s econ- rollover risks, and crowding out private sector ac- omy since it opened up in 1991 up to the years tivity. Payment arrears to businesses reached 5.2 following the global financial crisis of 2008. The percent of GDP in 2013, which in turn increased economic liberalization and early reforms of the the ratio of nonperforming loans (NPLs) from 6.5 1990s produced a per capita GDP growth of 6 percent in 2008 to almost 25 percent in late 2014, percent on average in real terms—the best per- and restrained banks’ supply of credit to the pri- formance of any non-oil rich European country— vate sector. As a result, around 123,000 jobs were and transformed Albania from the poorest coun- lost in 2008–09 and poverty increased. The global try in Europe to middle-income status by 2008. crisis thus exposed the vulnerability of Albania’s The global crisis and its aftermath slammed the domestic-oriented-growth model supported by brakes on the pace of progress and raised ques- foreign flows financing consumption and invest- tions about the ability of the economy to recover ment. The large macroeconomic imbalances gen- and continue on this path sustainably. To identify erated at the time eroded the economic gains of how Albania could generate sustainable and in- households and created disincentives for the ac- clusive growth and significantly reduce poverty, cumulation and productive use of factors of pro- the SCD proposed a conceptual framework based duction. The SCD concluded that pre-crisis drivers on the ‘assets model’ that analyzes the interplay of growth were exhausted and suggested that a between asset accumulation, utilization, and re- different model was needed. turns for households, firms and the government. The SCD then divides this framework into four II. Accumulation and efficiency blocks: (I) Pattern and inclusiveness of growth; of assets’ use (II) Accumulation and efficiency of assets’ use; (III) Despite being relatively young and healthy, Al- The enabling environment; and (IV) Sustainability. banians lack the skills and the opportunities to make the most of their human capital. As GDP I. Pattern and inclusiveness of growth grew strongly over the years, the labor market Up to the crisis, growth was fueled by foreign cap- remained structurally weak, characterized by low ital flows—including remittances from the mas- labor force participation and employment rates, sive Albanian diaspora—and foreign aid, which significant informality—including a substantial 64 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 share of unpaid family workers—and extremely immovable property. Sustainability of land man- high outmigration. For youth, women, minori- agement is also critical given the importance of ties, and the bottom 40, the barriers were greater. nature-based tourism and abundance of environ- These structural deficiencies worsened after 2008- mental hotspots. 09. For example, unemployment among youth While physical capital accumulation was an (15-29) increased to 29 percent in 2013. Sustained important driver of growth prior to the crisis, re- outmigration since the early 1990s also under- turns on capital were low and further declined by mined the stock of human capital and the poten- about 30 percent between 2000 and 2012. Total tial for job creation in the economy. Skills of young investment expanded on average by 13.3 per- Albanians are also low: despite students’ progress cent in 2000–08, driven mostly by private invest- in scores in international assessments, they show ment. However, capital investment both on the a learning gap equivalent to 2.5 years of schooling private and public side did not prioritize high re- relative to the OECD average. Moreover, inequities turn investment (for example maintenance over in human capital accumulation were large, with new roads). Moreover, weaknesses in financial much lower enrollment and educational attain- intermediation limit the accumulation and use ment among children in the bottom 40 percent. of financial assets. For example, Albania had 22 In preprimary education, for example, net enroll- branches per 100,000 adults in 2012 against 36 in ment was two times higher among the wealthiest the EU, and only 280 deposit accounts per 1,000 quintile than the poorest quintile, and in 2011, adults, compared with 2,245 in the EU. only a third of Roma children were enrolled in preschool. And in spite of being healthy on aver- The SCD concluded that inefficient use and age, disparities in outcomes were significant. For inequitable accumulation of Albania’s assets had example, infants in rural areas were twice as likely undermined growth and economic inclusion. to die before age 1 as those in urban areas, and over a quarter of children in the poorest quintile III. The enabling environment suffered from chronic malnutrition in 2009, com- Low institutional quality in Albania hampers eco- pared with 13 percent in the wealthiest quintile. nomic and social progress. An ineffective judicial Albania has also a large endowment of land, system prone to corruption and an inconsistent which it cannot efficiently use due to insecurity application of the rule of law have generated mis- of property rights. The lack of a well-functioning trust in the government as well as significant infor- land market has resulted in farm fragmentation mality. Dealing with construction permits, trade (in 2012, there were over 350,000 farms of below logistics, inspections, and property and land reg- one hectare) and uncontrolled growth of urban istration is more burdensome than in neighboring settlements. The lack of urban planning and un- countries. Public services are also constrained by controlled construction has distorted land use low capacity, limited accountability, territorial and density, reducing the growth potential of Al- fragmentation, and spatial inequalities in access. banian cities. Poor enforcement of property rights Moreover, an unreliable energy supply overtime is a key obstacle for firms, farms and households creates added costs for businesses and the gov- to enter the land market, and for poor landowners ernment. High dependence on hydropower (98 to reap the benefits from their assets. Moreover, percent of supply) combined with high distribu- women have a much lower rate of ownership of ANNEX 1 65 tion and collection losses have made the electrici- which are exacerbated by climate change, the ty sector a less-efficient and costly supplier. overexploitation of natural resources and growing pollution. In turn, this increases the vulnerability Finally, the main safety net program was poor- of households and the overall economy to climate ly targeted and had low coverage. As of 2012, the shocks, which, if materialized, can reverse the share of the poor covered by the program was only progress toward the twin goals. The SCD conclud- 24 percent, but the share of non-poor receiving ed that Albania needed to better manage its nat- benefits had risen from 5.2 percent in 2008 to 7.4 ural resources, which are key for competitiveness percent of the total in 2012.The benefits received and to secure the livelihoods of those relying on by the poorest quintile were among the lowest in agriculture, energy, water, tourism, and extractive Europe. Meanwhile, spending on disability assis- industries. tance increased because of growth in the number of beneficiaries and the overly generous index- Albania also faces social risks fueled by per- ation and ad hoc expansion in benefits. From 2007 ceptions of inequality and corruption, as well as to 2013, the number of beneficiaries rose by 50 barriers to equitable economic participation, es- percent to reach 165,000. The disability assistance pecially among vulnerable groups and minorities. program did not effectively target and support the The SCD concluded that exclusion was undermin- truly disabled. As a result, social safety nets failed ing social progress by reducing gains from the to cover the needs of most poor households. growth process for some groups and eroding trust in institutions. The SCD concluded that the quality of the insti- tutional and business environment as well as the provision of and access to public services were in- Prioritization effective in supporting the buildup, productivity, The SCD identifies the policy priorities to restore and use of Albania’s endowments. a sustained and inclusive growth process in Alba- nia. The SCD follows a two-stage approach: first, IV. Sustainability it identified twelve major constraints for progress towards the Twin Goals and formulated a policy Following the global crisis, the domestic-demand, priority to address each constraint. In the second foreign-financed growth model proved unsustain- stage, the SCD clusters the priorities according to able and caused severe increases in public debt, their direct impact on advancing the Twin Goals. fiscal deficits, public sector arrears and nonper- Three mutually reinforcing categories of priorities forming loans. While the financial sector remained resulted from this process: largely resilient to the global crisis, vulnerability increased because of the decline in banks’ prof- 1. Fundamental Priorities: considered funda- itability and potential deleveraging in a system mental, as they constitute a prerequisite for of mostly European banks’ subsidiaries. The SCD the success of all other policy priorities. They concluded that Albania was highly exposed to ex- include: (1) restoring fiscal sustainability and fi- ternal macroeconomic risk from the weak Euro- nancial stability; (2) establishing a high-quality pean recovery and its impact on demand for Alba- business environment that promotes firm grow- nian exports and workers abroad. th and job creation; (3) providing clean energy efficiently, equitably, and in a sustainable man- On the environmental front, Albania is exposed ner; (4) formalizing and enhancing the inclusi- to hydrometeorological and geological hazards, 66 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 veness and sustainability of the land market; nagement; and (4) ensuring more inclusive ac- and (5) enhancing governance, transparency, cess to financial markets. and the accountability of government toward 3. Sustaining Priorities: considered critical to citizens. enhancing the economic, social, and environ- 2. Supporting Priorities: they amplify the impact mental sustainability of the Fundamental Prio- of the Fundamental Priorities over the longer rities. The group includes: (1) enhancing the run. They include: (1) increasing the quality of effectiveness and efficiency of social protection labor market engagement among the bottom systems for the benefit of vulnerable groups, (2) 40, youth, women, and minorities; (2) improving ensuring the sustainable use of natural resour- the quality and relevance of the education sys- ces and the stewardship of the environment, (3) tem and skills training programs; (3) improving improving the quality and equity of health servi- the efficiency and equity of public resource ma- ces and reducing health-related financial risks. ANNEX 1 67 ANNEX 2 POVERTY PROFILE Socio-demographic characteristics by poverty status (% population), 2017 Source: Authors with data from Household Budget Survey 2017     Poor Non-poor Male 50 51 Gender Female 50 49 [0-14] 24 15 [15-24] 18 15 [25-34] 13 13 Age group [35-44] 13 11 [45-54] 13 15 [55-64] 10 16 [65+] 10 15 Primary or less 12 7 Incomplete secondary 51 35 Education level Complete secondary 30 37 Tertiary 7 21 Primary or less 14 8 Education of the household Incomplete secondary 53 35 head Complete secondary 28 39 Tertiary 4 18 <=2 3 18 3 7 19 4 23 30 Household size (# members) 5 26 18 6 20 10 7+ 20 5 68 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019     Poor Non-poor No children 31 56 With one child 25 21 Household type With two children 27 18 With 3+ children 16 5 Employed 37 45 Labor force status Unemployed 14 8 Inactive 49 47 Labor earnings 60 63 Pensions 17 23 Remittances 7 6 Sources of income Public transfers 12 5 Property income 1 1 Other income 3 2 ANNEX 2 69 ANNEX 3 STRATEGIC SECTORS FOR ALBANIA’S EXPORT-ORIENTED GROWTH MODEL Building on a three-dimensional analysis,* four sectors/sub-sectors emerge with high potential for a shift toward a higher value-added, high pro- ductivity, export-oriented growth model: Agriculture, Textile/Apparel, Tourism and ICT as export locomotives Edcuation & Health Textile & Apparel MAnufacturing Public Adm. & Construction Agriculture Transport Tourism Utilities Mining Other Trade ICT Share in GDP I. High Value Added Growth Med Share of Employment II. Low TFP Growth Share of Gross Exports III. Share of GVC Links in Exports Agriculture is the largest contributor to GDP percent of exports. Challenges include unreliable and the biggest employer. With higher produc- land titles; lack of scale; low take-up of new tech- tivity, agriculture and agri-business can play a nologies; deficient quality and compliance with much larger role in boosting exports. The sector standards, and higher input costs than in peers. can open up opportunities for factor relocation A functioning land market is critical for farmers to (e.g., labor) to higher value-added manufacturing access financing sources, increase in scale, and in- and services. Yet, it currently accounts for only 15 vest in competitive technologies. percent of exports, with low GVC linkages at 30 70 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 Albania’s manufacturing sector stands out coming tourists mostly being Albanian expats and as a fast-growing, large sector. It accounts for low-spending tourists. Poor infrastructure, lack of about 10 percent of total employment but has quality standards, weak branding and marketing seen negative TFP growth (-2 percent) over the and low institutional capacity are among the ma- past 4-5 years. The automotive parts and apparel jor challenges hindering the sector’s move up in manufacturing industries are significantly inte- the value chain. grated into GVCs, with the latter accounting for Although a nascent sector, ICT is among Al- nearly ¼ of total goods’ exports. Upside potential bania’s fastest-growing sectors (avg. growth to climb up the value chain is significant, given the 6 percent in 2015-17). It is also the fastest TFP size and knowhow accumulated in the sector. Yet, growth sector. Although starting from a low base, the sector remains highly dependent on Italian ICT is poised to become a larger share of GDP. ICT companies and faces growing competition and has significant GVC linkages and, therefore, carries risk of relocation to cheaper countries. The auto potential for greater knowledge and skills flow, as parts industry is a recently emerging sector, with well as for more private sector investment. There some FDI attraction based on low labor costs, in- has recently been a considerable increase in new cluding from Germany, France, and South Korea joint-venture activities between domestic and in the production of cabling and electromechani- foreign firms, signaling a growing interest. Cheap cal systems and rubber-metal, sealing and antivi- labor with relevant skills is the cost arbitrage op- bration parts subsectors. portunity creating a comparative advantage for Tourism emerges as relatively high-produc- Albania. “Digital Agenda 2015-2020” and “Nation- tivity sector at 2 percent TFP growth. According al Strategy for Science, Technology and Innova- to the 2019 World Travel and Tourism Council Re- tion 2017-2022” place ICT at the center of govern- port, tourism contributes 27.3 percent of GDP (di- ment focus. Major challenges faced by the sector rectly and indirectly), 56 percent of total exports include inadequate infrastructure, particularly and 25 percent of total employment. Tourist arriv- low and poor coverage of fiber optical network in als have increased in recent years, reaching near- rural and inter-urban areas, and a limited techni- ly 6 million in 2018—a 15 percent increase over cal skills base. 2017. However, the sector suffers high seasonal and geographical concentration leading to uncon- * Dimension 1: Output vs Growth; Dimension 2: Employment vs trolled development with growing environmental Productivity; and Dimension 3: Exports vs GVP Participation impacts. The sector’s value-added is low, with in- ANNEX 3 71 ANNEX 4 practices under which training providers (with a focus on technical and vocational educa- tion and training [TVET] institutions) operate, as well as those conditions and practices that contribute to good performance. TAP aims to help the World Bank Group’s (WBG) partner countries fill an information gap regarding two questions. First, it seeks to determine the KNOWLEDGE GAPS conditions and practices that make a training provider successful, measured in terms of the The SCD identified one key knowledge gap re- percentage of graduates who find employment garding Albanian labor market dynamics and after graduation or who enroll in further edu- distortions. There was insufficient evidence on cation or training activities. Second, it aims to existing disincentives and barriers to employment, find the most common constraints faced by particularly across some population groups. The training providers and how successful institu- SCD recommended to (a) conduct in-depth labor tions address them. market analysis to identify and propose policies • Job Dynamics in Albania: A note profiling Al- to address the disincentives and barriers to for- bania’s labor market (Honorati, Johansson De mal work (labor regulations, labor taxation, social Silva, Kupets, & Berger, 2018). Using the most protection, additional barriers), especially those recent data available on Albanian labor mar- affecting specific population groups dispropor- kets from the perspectives of labor demand tionately, and (b) collect timely, accurate data on (firms) and labor supply (individuals), this note labor market supply and demand that can also provides some key insights into the current feed into education and training system policies situation and important dynamics over time and reforms and active labor market policies. and across firms and workers with different Since then, the World Bank has contributed characteristics. The note is complemented by substantially to close this gap through the follow- two other reports that look at (i) skills develop- ing studies: ment challenges from the demand (employer) • Key Challenges and Trends in Albania’s side, and (ii) the role and effectiveness of the Labor Markets: Possible Policy Solutions National Employment Service (NES) in redu- (World Bank, 2017). The note highlights im- cing unemployment. portant areas to improve labor market condi- • Demand for skills in Albania: an analysis tions. The note deliberately focuses on labor of the skills towards employment and pro- supply and intermediation functions, and on ductivity survey (Honorati, et al., 2018). The the areas where the World Bank is engaged to report presents findings from the Albania STEP support the jobs agenda. Employer Survey, a nationally representative • Training Assessment Project (TAP) (World survey conducted between April and Octo- Bank, 2017). The World Bank launched the ber 2017 on a sample of 600 registered firms Training Assessment Project (TAP) initiative to drawn on the 2016 business register in Albania. identify the current conditions and common The STEP Employer Survey provides new and 72 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 important insights into the mix of cognitive, employment, for instance) and nature of in- socioemotional, and technical skills valued by formality (business registration, tax or social employers, the extent of skills gaps among em- security compliance, health and safety regula- ployers, the skills constraints among job appli- tions, etc.) is key to understanding the “pres- cants, the extent to which skills gaps affect fir- sure points” that generate non-compliance ms’ hiring decisions, and what firms are doing among firms and individuals and the appro- to address possible skills gaps; it also examines priate policy solutions. To identify the nature the functioning of the education and training of informality, specific data collection efforts systems based on employers’ perceptions. are needed, in combination with further analy- • Albania - A series of summary policy notes: sis of existing administrative and survey data Towards more, better and sustainable jobs sources. for Albania (Ungerer & Shijaku, 2018). This • Corruption and organized crime. While up- series of policy notes looks at 5 interlinked to-date measures of perceptions of corruption aspects of the issue. The first note addresses and the quality of the rule of law are widely the question of What is Albania’s labor market available, detailed case studies of how corrup- performance today? This overview note takes tion affects the effectiveness of markets and stock of Albania’s labor market indicators, ben- government functions would shed light on the chmarking against regional peers and iden- weaknesses in accountability and transparen- tifying segments of the population that have cy within the government and could inform so far been left behind. The second note asks policy solutions. Moreover, the weight of orga- How can Albania’s labor market institutions nized crime activities in the economy is unk- and regulations be strengthened to facilitate nown, but it is potentially large and with many job creation? The theme of the third note is ramifications into legal sectors of activity. A be- How can Albania create the right business en- tter understanding of this phenomenon would vironment to enable job creation? The fourth be informative for macroeconomic monitoring note addresses the question of How can Alba- purposes as well as for policy advise. nia equip its citizens today with the right skills • Monetary poverty. The last official poverty for the jobs of tomorrow? A final note proposes headcount for Albania was estimated using recommendations to strengthen labor market consumption data from the Living Standards statistics to better monitor progress on Alba- Measurement Survey (LSMS) collected in 2012. nia’s jobs and growth agenda going forward. Starting in 2016, Albania has collected the Sur- vey of Income and Living Conditions, which During the preparation of the SCD Update, the only measures income but can be used to es- team has identified additional key gaps in the timate absolute (income) poverty. Since Al- knowledge base in Albania. Additional informa- bania will only monitor relative poverty going tion to fill these gaps would enable a more precise forward (that is, the percentage of the popula- identification of policy actions to address the pri- tion living with less than 60 percent of the me- orities identified by the SCD Update. They include: dian income per capita), it will be important to continue to produce measures of absolute • Informal economy, including tax complian- poverty that can be compared internationally ce. Assessing the extent (in terms of GDP or ANNEX 4 73 and over time, as well as detailed poverty diag- including expansion of elderly care. nostics. • Firm productivity and management practi- • Discrimination in access to services: While ces. While diagnostics of firm-level producti- gender, ethnicity and SOGI -based gaps in out- vity indicate large differences across Albanian comes have been documented, discrimination firms and relative to EU firms, the reason for in access to services is less well understood. these gaps needs to be further explored. One Addressing public policy biases is key to for- important avenue would be to use a survey to mulating policies that will effectively close the study the management practices of Albanian outcome gaps for these groups. firms, combined with an analysis of key chan- nels through which these management practi- • Demographic change. There is a gap in un- ces can be improved going forward. derstanding the impact of demographic trends, including aging and migration. on eco- • Public Investment Management (PIM). A nomic performance, fiscal sustainability of so- comprehensive analysis of the quality of PIM, cial systems as well as welfare outcomes. A be- detailing the process for selecting, designing, tter insight into these trends could help inform and implementing public investment projects, fiscal policy, including reform of social welfa- would provide insights into the weaknesses of re systems, economic policy, including labor the system and help identify concrete policy market activation measures and social policy, solutions. 74 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 ANNEX 5 MAIN MACROECONOMIC INDICATORS Description   2017 2018 2019e 2020f 2021f 2022f Real GDP growth (percent) 3.8 4.1 2.2 -1.4 6.5 3.4 Composition (percentage points):               Consumption 3.7 3.9 2.6 -1.4 4.3 2.9   Investment -0.2 1.0 -1.1 0.9 1.5 0.5   Net exports 0.3 -0.8 -0.9 -3.1 -4.6 -1.7     Exports 4.0 1.0 2.0 -5.5 2.7 1.7     Imports (-) 3.7 1.8 1.3 -4.5 1.9 1.7 Consumer price inflation (percent, period average) 2.0 2.1 1.4 2.1 2.4 2.9                   Public revenues (percent of GDP) 27.7 27.6 27.8 26.4 26.9 26.9 Public expenditures (percent of GDP) 29.8 29.4 29.7 30.5 29.3 29.0   Of which:                 Wage bill (percent of GDP) 4.7 4.5 4.6 4.4 4.4 4.5     Social benefits (percent of GDP) 15.1 15.0 15.6 15.7 15.2 15.1     Capital expenditures (percent of GDP) 4.4 4.8 4.5 5.6 5.0 4.7 Fiscal balance (percent of GDP) -2.0 -1.8 -1.9 -4.1 -2.4 -2.2 Primary fiscal balance (percent of GDP) 0.0 0.4 0.2 -2.0 -0.1 0.0 Public debt (percent of GDP) 67.8 64.6 64.4 68.4 65.1 63.3 Public and publicly guaranteed debt (percent of GDP) 71.9 69.7 68.0 71.8 68.1 66.3   Of which: External (percent of GDP) 32.6 32.9 31.5 32.5 28.8 28.9                   Goods exports (percent of GDP) 6.9 7.7 6.6 6.0 5.8 5.7 Goods imports (percent of GDP) 31.3 30.2 29.7 29.2 28.3 27.8 Net services exports (percent of GDP) 9.4 8.6 9.3 7.1 7.9 8.4 Trade balance (percent of GDP) -15.1 -13.8 -13.7 -16.1 -14.5 -13.7 ANNEX 5 75 Description   2017 2018 2019e 2020f 2021f 2022f Remittance inflows (percent of GDP) 5.5 5.2 5.1 5.1 5.0 4.8 Current account balance (percent of GDP) -7.5 -6.7 -7.6 -8.1 -7.0 -6.2 Net foreign direct investment inflows (percent of GDP) 8.6 8.0 7.6 6.4 7.4 7.3 External debt (percent of GDP) 68.7 62.9 60.6 61.7 60.6 60.7                   Real private credit growth (percent, period average) -2.3 -3.0 n.a. n.a. n.a. n.a. Nonperforming loans (percent of gross loans, end of period) 13.2 11.1 n.a. n.a. n.a. n.a.                   Unemployment rate (percent, period average) 13.7 12.3 11.5 n.a. n.a. n.a. Youth unemployment rate (percent, period average) 25.9 23.1 n.a. n.a. n.a. n.a. Labor force participation rate (percent, period average) 58.3 59.4 n.a. n.a. n.a. n.a. GDP per capita, PPP (current international $) 11,693 15,101 n.a. n.a. n.a. n.a. Sources: Country authorities, World Bank estimates and projections. Note: Youth unemployment rate is for labor force aged 15-29. Change in inventories is included in Investments 76 ALBANIA SYSTEMATIC COUNTRY DIAGNOSTIC - UPDATE 2019 ANNEX 6 List of institutions consulted: Government and governmental institutions • Prime Minister office • Ministry of Finance • Ministry of Infrastructure and Energy • Ministry of Health and Social Welfare SCD UPDATE CONSULTATIONS • Ministry of Interior Internal and external consultations were held • Ministry of Culture for the SCD Update between May and December • Bank of Albania (BoA) 2019. • Albanian Investment Development Agency (AIDA) Internal consultations: • Albanian Rural Development Agency (ARDA) Country team meetings with IBRD, IFC and MIGA were held throughout the SCD drafting process. A • Albanian Development Fund first meeting took place in May 2019 to take stock • Albanian Electro-energetic Corporation of the country team’s views on the developments (KESH) in each sector since the first SCD and the main pri- • Institute of Statistics (INSTAT) orities going forward. Bilateral consultations with GPs, IFC and MIGA followed during June-October. • Albanian Financial Supervisory Authority A second meeting took place in November 2019 to (AFSA) discuss the main findings of the analysis and the • State Cadaster Agency (SCA) emerging messages. A final team meeting took • Albanian Development Fund (ADF) place in early December to discuss and validate the proposed priorities. • Health Insurance Fund (HID) • Institute of State Social Services External consultations: • Water Resources Management Agency (WRMA) External SCD consultations were held during Development Partners September 18-19, 2019 in separate sessions with more than 80 representatives from government • Swiss Embassy and its main institutions, Bank of Albania, private • Dutch Embassy sector, civil society and development partners. In • UNDP their discussions, they welcome the consultative process with local and international stakeholders, • AICS-Italian Cooperation validating most of the findings and messages of • OSCE the SCD presentation. • German Embassy • US Embassy ANNEX 6 77 • USAID • Co-PLAN • EBRD • Albanian Center for Economic Research (ACER) • UNICEF • Center for Economic and Social Studies (CESS) • EU • Regional Environmental Center (REC) Private Sector • Institute of Roman Culture in Albania (IRCA) • American Chamber of Commerce • Cooperation Development Institute (CDI) • DM Consulting Services Following on the consultation feedback and • Statkraft Albania the inputs provided by the different stakeholders, • Foreign Investors Association of Albania the team has shared versions of the SCD draft with Civil Society Organizations the different stakeholders as requested, for addi- tional feedback. 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