Albania: Sustaining Growth in a challenging environment. June 1, 2010 ABCDE conference, Tirana The World Bank

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1 Albania: Sustaining Growth in a challenging environment June 1, 2010 ABCDE conference, Tirana The World Bank

2 Outline Economic track record Investment and employment Old and new challenges for growth Conclusions

3 A strong track record in macroeconomic management Steady growth for 10 years (average 6%) Per capita income growing Inflation below 3% on average Fiscal consolidation until 2007 Less (but not zero) impact of the crisis on Albania 3

4 Growth, inflation and external balance ,0 GDP growth 60,0 10,0 Inflation 50,0 Imports 8,0 40,0 6,0 4,0 30,0 20,0 Exports 2,0 10,0 Remittances 0, ,

5 Employment and investment Between 2002 and 2008 non-agricultural employment and outward migration accommodated the fall in agricultural employment. Productivity growth could largely be explained by the reallocation of labor from agriculture to sectors with higher productivity Growth based on continued reallocation is likely to be less sustainable over the coming years Important to accommodate increase in working population without further migration Higher productivity and employment will require higher investment But private non-residential investment has been declining 5

6 Employment patterns Employment structure, LSMS Agriculture Mining/utilities Manufacturing Commerce Services Employment structure, Labor force surveys, INSTAT Others Services Constructi on Industry Public services Other Total Agriculture Annual Growth of employment : LSMS 0.2% INSTAT 1%

7 Structure of investment Investment as % of GDP Total Private residential Private non residential Public

8 Promoting investment: some general propositions Investment will flourish in an environment where returns are relatively high, uncertainty low and the rules clear Returns to investment depend on the ability of the country to absorb and effectively use new technologies availability of complementary factors of production (quality of human capital, availability of physical infrastructure and soft infrastructure - institutions) Uncertainty reduces perceived returns to investment. Potential sources of uncertainty are: macroeconomic or financial instability, unexpected changes in the regulatory or tax framework Governance and the rule of law: uncertainty about whether laws will be enforced and whether government policy commitments are credible Poorly defined or enforceable property rights 8

9 Many challenges have been tackled. Sound macro-economic framework established until 2007 Effective and well supervised financial system established Road infrastructure has been increased Electricity sector restructured, private capital introduced to improving distribution Reforms of basic and secondary education curricula started Legal frameworks for business registration, inspections and bankruptcy established

10 But new problems and constraints are emerging Tax rates % Tax rates % Corruption 71% Corruption 66% Skills and education of workers 39% Skills and education of workers 53% Electricity 62% Electricity 81% Access to financing 45% Access to financing 41% Tax administration 65% Tax administration 45% Telecommunications 21% Telecommunications 56% Courts 58% Courts 39% Access to land 26% Access to land 43% Business licenses and permits Alb SEE ECA 38% 0% 25% 50% 75% 100% Business licenses and permits Alb SEE ECA 31% 0% 25% 50% 75% 100% Source: BEEPS 2005 and 2008

11 11 Constraints on growth and development Each of the constraints on investment suggest a perception (and reality) of long term productive investments being risky The returns from long term productive investments are not yet fully appropriable to the investor (uncertain business environment, risk of unofficial expropriation, lack of skilled workers and underdeveloped ICT increases costs) The ex-ante perception of private investment returns, in terms of their level and dispersion (and particularly the risk of complete loss of capital), determines whether investment will be encouraged or discouraged.

12 The new challenge - promoting investment and innovation in the Albanian economy through: Development of an educated labor force, with quality education and skills relevant for a market economy (including ICT skills) Promoting conditions to end the Brain Drain from 1990 to 2008 over 40% of the staff of universities and research institutes have left Albania Supporting the development of ICT infrastructure: Albania has one of the lowest internet penetration rates in Europe (2.5% compared to 7.7% in the region and 22.9% in the EU) Ensuring effective rule of law laws are consistent, stable, implemented and adhered to by officials Maintaining a constant and high quality electricity supply Re-establishing sustainable macro-economic policies in an uncertain world how much debt and deficits can be tolerated?

13 What is new about the challenges? They are complex and interlinked: insufficient opportunities drove migration, reducing skills and the quality of tertiary education policy is now designed to reverse this Historical legacy and institutions reduce quality and relevance of education Slow development of ICT was a combination of lack of ICT education, slow development of regulatory frameworks, and need for investment in backbone IT infrastructure, and quality of electricity supply recently very active policies to tackle this More challenging external environment weakens macro-economic performance makes it more difficult to make commitments and managing public administration to achieve certain policy goals Some private investment is limited by uncertainty about the ability to implement and enforce laws and regulations They all involve developing the ability to be able to respond flexibly to a rapidly changing environment and particularly to adopt new technologies and organization forms

14 Ensuring macro economic stability: fiscal policy and debt alternative scenarios Adjustments in fiscal stance take time to affect levels of debt High levels of debt raise financing costs, make financing more difficult (or impossible see Greece) Markets look to the future what will the level of debt be in two or five years will the country be solvent Errors in forecasts, or a external shocks can make big differences to sustainability Fiscal deficit (%GDP) Debt (%GDP) How to convince creditors and investors which path has been chosen?

15 What the markets look for: stability, predictability and security In the future there will be in aggregate less financing and foreign investment available Those resources that are available will be attracted to countries which can provide stability, predictability and security in policies and macro-economic outcomes In practice this means no unpleasant surprises implying: Adopting conservative policy targets for revenues, growth and deficits overachieving a modest target is better than failing to achieve an ambitious one Not hiding the bad news it always comes out in the end (look at Greece) Explaining the basis of policy decisions, and abide by any rules Reducing levels of debt debt close to 60% of GDP in a developing country is perceived as a potential risk

16 What investors look for: rule of law and efficient public administration Continued efforts to promote integrity of public systems: e.g., legal and judiciary, expenditure management. Efficient and transparent public administration necessary for effective implementation of reforms Ensure reliable, predictable and fair enforcement of the rule of law, including rules governing the actions of public sector Respect for basic administrative procedures 16

17 What employers look for: skilled workers and managers Skills are seen increasingly as a constraint to investment, particularly in more sophisticated technology and complex processes Employers need workers with flexibility and the ability to learn quickly They also need managers the lack of good managers is often a major constraint on the expansion of a firm There are few effective mechanisms to communicate these needs to the education system

18 Conclusion Sustaining growth requires: Establishing rules and institutions which promote productive investment, strengthen education and skills, permit the rapid development of modern infrastructure (particularly ICT) Respect for the rules and institutions established Recognition that financing will be difficult and external shocks likely Cautious macroeconomic policies 18

19 19 The World Bank

AN OVERVIEW ON ALBANIAN ECONOMIC DEVELOPMENT INDICATORS

AN OVERVIEW ON ALBANIAN ECONOMIC DEVELOPMENT INDICATORS Secretariat of Albania Investment Council, December 2017 Note: This Material is a summary of some of the main indicators and does not represent the