TIRANA, Jan. 16 – Albania’s economic freedom score has been rated at 65.1, making its economy the 57th freest in the 2012 Index. Its level of economic freedom increased by 1.1 points during the past year, due primarily to improvements in freedom from corruption and business freedom. Albania is ranked 26th freest among the 43 countries in the Europe region, and its overall score is above the world average. The report published by the conservative U.S. think tank Heritage Foundation and the Wall Street Journal sandwiched Albania between Latvia and Jamaica.
Albania’s foundations of economic freedom are undermined by poor protection of property rights and pervasive corruption. The low property rights score is largely a result of political interference in the judiciary. The government has maintained a competitive tax environment with a flat rate of 10 percent. Expansionary government spending has resulted in budget deficits in recent years, but the deficits have been narrowing.
Significant diversification of the economic base has increased economic dynamism, and the country has experienced strong economic growth that has reduced poverty and unemployment rates. The efficiency of the regulatory system has been facilitated by a broad simplification of business procedures. Although foreign direct investment has increased in recent years, levels still remain among the lowest in the region.
Background
Albania remains one of Europe’s poorest countries despite some economic and political reform since 1992, when nearly 50 years of Communist rule ended. The government has been pursuing greater integration into the Euro-Atlantic community. Albania signed a Stabilization and Association Agreement with the European Union in June 2006 as the first step toward EU membership and submitted a full application for membership in April 2009. In a step toward membership, it was granted entry into the visa liberalization regime for the Schengen zone in November 2010. In April 2009, Albania achieved full membership in NATO. Transportation and energy infrastructure are poor by European standards, and the economy is dominated by agriculture and services, including tourism.
Limited government
Personal and corporate tax rates are a flat 10 percent. Other taxes include a value-added tax (VAT), a property tax, and an inheritance tax, with the overall tax burden amounting to 25.7 percent of total domestic income. Government expenditures stand at 31.9 percent of GDP, and the budget deficit hovers around 4 percent of GDP. Total public debt, which has increased since 2007, is 58.2 percent of GDP.
Regulatory efficiency
Business start-up procedures have been simplified. The minimum capital requirement for setting up a company has been reduced considerably, and new insolvency laws make closing a business straightforward. Labor demand in the formal economy, which has a high level of self-employment, is highly influenced by the public sector. Inflation has risen slightly due to higher commodity prices, higher excise duties, and increased health care costs.
Open markets
The trade weighted tariff rate is 5.1 percent. Licensing requirements are minimal, and the government does not impose export taxes, but inadequate trade capacity and administrative bureaucracy delay trade and increase costs. Foreign and domestic firms are treated equally under the law, but inefficient bureaucracy discourages dynamic investment. Most banks are foreign-owned, and the banking system has benefited from more competition.
