The Albanian Economy in Transition:
The Role of Remittances and Pyramid Investment Schemes
by James P. Korovilas
Correspondence:
Mr James Korovilas
Faculty of Economics and Social Science
University of the West of England
Coldharbour Lane
Bristol BS16 1QY
Telephone:(0117) 9763869
Facsimile:(0117) 9763870
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The Albanian Economy in Transition:
The Role of Remittances and Pyramid Investment Schemes
by James P. Korovilas
Abstract
The Albanian economy in the 1990s experienced a rapid recovery from its near collapse in 1992. The rapid economic growth between 1993 and 1996 was exceptional by East European standards, and represented the highest rate of sustained economic growth of all transition economies.
This investigation indicates that the standard explanations for recovery and growth in transition economies, such as the pace of economic reform or the levels of domestic and foreign investment, do not adequately explain the rapid growth of the Albanian economy. Factors specific to Albania also need to be considered.
The main conclusion drawn here is that the success of the Albanian economy in the mid-1990s rests largely upon the inflow of remittances from Albanians working abroad. These remittances are shown to have been much greater in value than was previously assumed by the IMF: in the region of $700 million per annum rather than $400 million. Remittances are also found to have played a much greater role in Albania's economic recovery than was previously recognised.
It is demonstrated that the rise of pyramid investment schemes in 1996 was closely linked to the inflow of remittances. Such schemes are also found to have played a part in fuelling the rapid economic growth in the Albanian economy, before their collapse in 1997.
Introduction
The economic transformation of post-communist Albania has had several features which are unique by East European standards. During the 1990s, an enormous proportion of Albania's labour force has worked abroad, with an estimated 400,000 Albanians working in Greece and Italy. These migrant workers play a important part in supporting the Albanian economy since a large proportion of their earnings are transferred back home. Also unique to Albania is its rate of economic growth in the post-communist era, which has outpaced that of all other transition economies. Lastly, Albania has recently witnessed the growth and collapse of a series of pyramid investment schemes, which were larger - relative to the size of the economy - than any previous schemes of this kind. This paper aims to investigate these three features of the Albanian economy and thereby determine whether there is a clear link between foreign remittances, economic growth and the pyramid investment schemes.
Since the collapse of communism, most East European countries have shared the experience of economic collapse, followed by gradual recovery. The reasons for the economic collapse of the early 1990s, typified by large falls in GDP accompanied by hyperinflation, are well documented and uncontroversial. Falling levels of output across Eastern Europe resulted from factors such as the collapse of central planning and the subsequent shortages of vital inputs. Hyperinflation in the early and mid 1990s was largely a result of monetary overhang from the communist era, coupled with the inability of post-communist governments to implement suitable fiscal and monetary measures to control inflation. In contrast to the lack of debate on the causes of the initial economic collapse in Eastern Europe, there is much debate over the reasons for economic recovery, and especially its pace. It is clear that, from the mid to late 1990s, almost all of the countries of Eastern Europe have experienced economic growth, coupled with reduced inflation. It is also clear that the rate of economic recovery is not consistent across Eastern Europe, with economic growth in Poland and Albania, for example, far exceeding that in Hungary and Slovenia (see Table 1). The explanations for these disparities in the speed of recovery across Eastern Europe have focused upon factors such as: the pace of economic reform; the extent to which inflation has been controlled; the length of time spent under communism; and the degree of political stability. There is little doubt that these factors are important in explaining the pace of economic recovery in most East European countries, yet it is doubtful whether they can adequately explain its rapidity in Albania.
Insert Table 1 near here
The Albanian economy from 1993 to 1998 experienced the fastest rise in real GDP in Eastern Europe. Gros and Steinherr (1995) have demonstrated the link between the pace of economic reform and the speed of economic recovery in transition economies. This explanation of Albania's strong economic recovery is compelling, given that the pace of economic reform in Albania has been described as being rapid (EBRD, 1995). Indeed, Hashi and Xhillari (1997) conclude that the success of the Albanian economy can largely be explained by the implementation of a comprehensive privatisation programme. There is little doubt that these factors do form an important part of the overall explanation for the recent success of the Albanian economy, but we cannot ignore the fact that Albania has only recently emerged from a long period of isolationist central planning and it possessed few of the advantages enjoyed by other more successful transition economies. It is, therefore, unlikely that Albania's recent economic success can simply be explained by its adoption of an appropriate set of government policies. It is necessary also to consider the role that factors specific to Albania have played in the country's recent development. For instance, a large proportion of Albania's population work abroad and send money back home. This study seeks to show that these remittances are substantial and are playing an important role in the economy's development.
A unique recent feature of the Albanian economy is the rise and collapse of several fraudulent pyramid investment schemes. Although such schemes have also appeared in other transition economies, the Albanian experience is unique since Albania's pyramid schemes were significantly larger, relative to the size of the domestic economy, and led to a greater degree of political and economic turmoil when they eventually collapsed. In the period 1995-96, pyramid investment schemes attracted total deposits equivalent to roughly half of Albania's GDP in 1996. This study will also attempt to establish a link between the flow of remittances and the rise and fall of these schemes.
Background to Remittances
The fall of communism in Albania marked the end of one of Europe's most repressive political regimes this century. Prior to 1989, Albanian citizens were subjected to severe restrictions on their movements. Travel between the different regions of Albania required official approval, and travel to `restricted areas' such as border regions was strictly forbidden. Foreign travel was almost totally restricted, with only diplomats and members of the government having the opportunity to see the outside world. So great was the desire of the Albanian government to shield their population from the `corrupting influence' of the outside world, that they even took the extreme precaution of ensuring that Albanian diplomats were unable to speak the language of their host country, imagining that this would prevent them from being seduced by capitalist propaganda.1
In the early 1990s, Albanians witnessed a wide range of political and economic changes. In the political sphere, the government relaxed its control on foreign travel, finally abolishing all restrictions. However, trying legitimately to leave a country which has no previously negotiated reciprocal travel agreements proved to be very difficult, especially so since no country was willing to issue travel visas to large numbers of destitute Albanians (Hashi and Xhillari, 1997). Despite these bureaucratic restrictions, the desire of ordinary Albanians to leave their country was rapidly increasing, perhaps as a result of access to Italian television channels, which had previously been jammed, allowing many Albanians their first glimpse of affluent life in the West. At the same time, the collapse of central planning led to widespread unemployment. This, coupled with the chronic food shortages which afflicted the country, provided the degree of desperation sufficient to force people to accept the risks involved in leaving their home country to find work abroad.
As the desperation of the Albanian people increased, and visas failed to materialise, many people illegally made their way across the Adriatic into southern Italy or crossed the border into Greece. The fact that the vast majority of Albanian emigrants chose to enter Greece rather than Italy can be explained in several ways; Lazaridis and Romaniszyn (1998) argue that migration from Albania to Greece is partly a result of historical linkages between the two countries and partly due to the ease with which illegal immigrants can cross the largely unguarded Greek-Albanian border.
In order to understand the effect on the Albanian economy of the remittances sent home by Albanians working abroad, both the number of Albanians working abroad and the size of their remittances need to be calculated. Most publications dealing with this phenomenon are in agreement over the number of Albanians working abroad; an annual average of 400,000 men and women were employed in either Greece or Italy between 1992 and 1996.2 Since Greece is far more accessible than Italy, and far less hostile to illegal immigrants (there have never been immigration detention camps in Greece), it is not surprising that roughly 90% of Albanian emigrants chose to search for work in Greece rather than risk incarceration or forced repatriation in Italy.
The vast majority of Albanian immigrants had no desire to remain in Greece in the long term, but simply wished to work for a few years in order to support themselves and send money back home to support their families in Albania. Initially most Albanian workers in Greece were driven by desperation, and thus had modest subsistence requirements. However, they soon realised that the ready supply of well-paid casual work presented them with the opportunity to work for a few years and accumulate substantial sums (by Albanian standards).3 After working in Greece for several years and accumulating a large capital sum, many Albanians would return home and invest their money in order to provide them with long-term security (Lianos et al., 1997). For example, many of Albania's new private businesses, such as petrol stations, were established with money earned by migrant workers in Greece.4 There is little doubt that Albanian workers in Greece had a great incentive to send a large proportion of their earnings back to Albania. It is evident that migrant workers with dependent families were responsible for the consistent but small flow of remittances, whereas those returning to live in Albania would often transfer a large sum, which could either be invested or used to establish a small business.
In order to estimate the impact of these remittances on the Albanian economy, it is necessary to calculate their total value, but there is no consensus on the size of this figure. In contrast to the agreement on the number of Albanians working abroad, there is a wide range of estimates of the total annual value of remittances injected into the Albanian economy. The most conservative estimate is from the IMF, which puts the annual inflow of remittances at $200 million (IMF, 1994). At the other extreme, the FT survey on Albania offers a much higher figure of $400 million (FT, 1997). Since the various sources do not explain how they have arrived at their estimates, it is very difficult to know how credible they are. In the absence of reliable data, it is worth putting these figures to the test by comparing them with an independent calculation of the total value of remittances, based upon reasonably reliable information about Albanian migrant workers.
Calculating the Size of Remittances
If we start by assuming that the average number of Albanians working abroad is about 400,000, and we then assume that 90% of them are working in Greece, this gives us a figure of 360,000.5 However, it is fair to assume that not all of these 360,000 will be continuously employed. Therefore, if we reduce this figure to, say, 300,000, we are left with a reasonable estimate of the number of Albanians working in Greece at any one time.
The next stage is to determine the average earnings of an Albanian migrant worker. Research by Lianos et al. (1997) reveals that the average daily wage for migrant workers is about $30. This figure takes into account two important factors determining the wages of migrant workers. First, the dispersal of workers between the more lucrative construction industry, with its relatively higher wages, and the less well-paid agricultural sector. Secondly, the wage differential between legal and illegal migrant workers. By knowing both the size of the Albanian workforce in Greece, along with their average wage, it is possible to determine their total earnings.
However, determining the value of total remittances requires us to know the average propensity to save (APS) of Albanian migrant workers, yet estimating this is difficult for two reasons. First, there may be significant differences in migrant workers' individual circumstances, which may affect their tendency to save. Secondly, workers who are essentially illegal immigrants may be unwilling to reveal information about their savings. Nevertheless, if we accept the APS figure provided by Lianos et al., which suggests that one-third of Albanian migrant workers' earnings are transferred back to Albania, we can then proceed to estimate the total value of remittances. An APS of 33% appears acceptable and is more modest than the figure of 54% suggested by Markova and Sarris (1997) for Bulgarian workers in Greece.
With this final piece of the jigsaw in place, we can state the formula for calculating the size of total remittances received by Albanian workers in Greece:
R = s (N W)
whereR is total daily remittances from Albanian workers in Greece in US$,
N is the number of Albanian workers active in Greece at any one time,
W is the average daily wage of Albanian migrant workers,
s is the proportion of earnings sent back to Albania in the form of remittances.
Given N = 300,000, W = 30 and s = 1/3, we get a value for R of $3 million. Therefore, if all 300,000 economically active Albanians in Greece worked on a particular day, and sent one-third of their earnings back to Albania, this would result in a total remittance of $3 million for that day. To obtain the annual figure for remittances, we need to calculate the number of working days per year for an economically active Albanian worker. Greece, like all other EU countries, has an official figure for the number of working days per year. This is 365 minus weekends and public holidays, 365 - (104 + 27), which gives us a figure of 234 working days in a year. Therefore, if $3 million in remittances was generated daily, this would give us a total annual value of roughly $700 million.
Of course, this figure for the annual number of working days usually only applies to workers in the public sector and those working for large employers, and does not take into account the fact that Albanian workers may choose to work more than the official number of working days. There is also the possibility that some Albanian workers might be employed on a more formal basis, and therefore receive payment for public holidays. However, the purpose of this calculation is to provide strong evidence that the official estimates for the size of total remittances are far too low. The fact that the figures used in its calculation have been rounded down thus adds further credence to the result of $700 million, since even this modest estimate for the total value of remittances far exceeds the figures given by the IMF, World Bank, FT and Economist Intelligence Unit. This result appears even more striking when we consider that the figure of $700 million pertains to remittances flowing from Greece to Albania, and therefore takes into account only 90% of Albanians working abroad.
A figure of $700 million cannot be reconciled with the official data on the total value of remittances flowing into Albania. Moreover, this figure is substantially larger than the IMF's estimate of $400 million. Therefore, if the basic assumptions made here are correct, the IMF's estimate of the total value of remittances must be far too low, even if we allow for a reasonable margin of error. My calculations suggest that a typical Albanian worker in Greece should be able to save at least $2,333 per year. To prove that this was possible, it was necessary to find hard evidence of the amount of money that a typical Albanian migrant worker had saved over a given time period. This task proved to be very difficult since illegal migrant workers are regularly robbed and deported, making them very wary, and therefore reluctant to reveal information about their savings. The solution to this problem was to obtain information, from a reliable source, about the amount of money saved by Albanian workers.
Albanian workers in Greece save their money in several different ways. Some regularly save small amounts, which are then taken to Albania by couriers for a commission. This is a popular way of transferring funds, especially for those who are supporting a family in Albania.6 However, it is very difficult to establish how much money is being transferred when people use this method, since no records are kept. For those people without dependents in Albania, the preferred method of saving is to accumulate a large sum of money while working in Greece and to take it with them when they return to Albania. People who saved and transferred money in this way would be in an ideal position to provide precise information about the APS of Albanian workers in Greece, since they could reveal exactly how long they had worked, and exactly how much they had saved in that time. However, most Albanians in Greece do not bank their savings, which makes them very unwilling to disclose information about their savings, since they fear betrayal and have much to lose.