TIRANA, Jan 14 – Albania’s economy seems to be on track, according to a survey conducted by the Heritage Foundation.
Ten Economic Freedoms of Albania
67.0 Business Freedom Avg. 64.3
70.0 Investment Freedom Avg 48.8
75.8 Trade Freedom Avg. 73.2
70.0 Financial Freedom Avg 49.1
92.8 Fiscal Freedom Avg. 74.9
30.0 Property Rights Avg 44.0
75.6 Government Size Avg. 65.0
29.0 Fdm. from Corruption Avg 40.3
79.6 Monetary Freedom Avg. 74.0
47.2 Labor Freedom Avg 61.3
Albania’s economic freedom score is 63.7, making its economy the 62nd most free in the 2009 Index. Its level of economic freedom increased by 1.3 points during the past year and it has improved in three of the 10 freedoms. Albania is ranked the 27th freest among the 43 countries in Europe.
Comparatively, Albania’s freedom level is on par with that of other developing Balkan states like Croatia and Macedonia. Fiscal freedom, investment freedom, and financial freedom all rate significantly higher than the typical country’s levels. Albania recently adopted a flat rate of 10 percent for both individual and corporate taxes, and the government has focused on developing an economic strategy that fosters growth driven by the private sector. However, Albania’s overall score is reduced by weak property rights and pervasive corruption. Money-laundering is a significant problem in the cash-based economy. The low property rights score is largely a result of political interference in the judiciary, which leads to erratic enforcement of laws.
Albania’s economic freedom ranks above the world average, and its score has risen rapidly over the years, a noteworthy achievement in a region characterized by political fragmentation and instability.
Although economic growth and reform have advanced since the end of nearly 50 years of Communist rule in 1992, Albania remains one of Europe’s poorest countries.
It has actively pursued greater integration into the Euro-Atlantic community over the past few years and in April 2008 formally undertook to complete the process leading to full membership in NATO, with 2009 as the target date.
In June 2006, Albania signed a Stabilization and Association Agreement with the European Union as the first step toward EU membership, as well as a free trade agreement giving Albanians duty-free access to key EU markets and opening the country to imports. The agricultural sector remains the largest source of employment and transportation and energy infrastructure are poor by European standards.
Despite some improvement, Albania’s business freedom remains constrained by a burdensome regulatory environment. Starting a business takes eight days, compared to the world average of 38, but obtaining a business license requires 24 procedures, compared to the world average of 18, and almost 100 more days than the world average of 225.
Albania’s weighted average tariff rate in 2005 was 7.1 percent. Import taxes may be used to establish government-determined fair market prices for goods, and inadequate trade capacity and administrative bureaucracy can delay trade and increase costs. Ten points were deducted from Albania’s trade freedom score to account for non-tariff barriers.
Albania’s competitive tax rates enhance incentives for entrepreneurs and workers. In June 2007 the government approved a fiscal package that includes flat personal income and corporate tax rates of 10 percent, effective on July 1, 2007 and January 1, 2008, respectively. Other taxes include a value-added tax (VAT), a property tax, and an excise tax. In the most recent year, overall tax revenue as a percentage of GDP was 22.9 percent.
Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 28.5 percent of GDP. The government has revitalized its efforts to further privatize the insurance and energy sectors and to divest its remaining share in the national mobile phone operator.
Inflation is relatively low, averaging 2.7 percent between 2005 and 2007. The government continues to oversee prices through regulatory agencies, and 10 points were deducted from Albania’s monetary freedom score to adjust for this.
Foreign and domestic firms are treated equally under the law and nearly all sectors are open to foreign investment. Agricultural land may not be purchased by foreign investors but may be rented for up to 99 years. Foreigners may purchase commercial property if the proposed investment is worth three times the price of the land. There are no restrictions on the foreign ownership of other property. Foreigners may own 100 percent of Albanian companies, and monetary expatriation is legal. Residents and non-residents may hold foreign exchange accounts. The state can expropriate an investment or asset for the purpose of public interest, but there are legal provisions for compensation. Non-transparent regulations, inefficient bureaucracy, and corruption discourage foreign investment.
Albania’s well-capitalized financial sector has grown rapidly in recent years. Banking is increasingly dominated by foreign banks, which accounted for about 90 percent of total assets in 2007, up from less than 50 percent in 2003. As of 2007, there were 17 banks, of which 15 were foreign-owned or joint ventures. The growing presence of foreign banks has increased competition and expanded available services. Enforcement of financial regulations can be weak but oversight of the non-bank financial sector is consolidated in one body. A new banking law took effect in June 2007 and supervision has been strengthened. Albania also established a new credit bureau in January 2008. The government has separated the Tirana Stock Exchange from the central bank, but the stock market remains inactive and no shares are listed yet.
Albania’s judicial system enforces the law weakly and is one of the country’s most tainted institutions. Judges are often appointed strictly for political reasons and can be corrupt. Organized crime is a major obstacle to the effective administration of justice. Judges are subject to intimidation, pressure and bribery while judicial reform remains very slow. Protection of intellectual property rights is weak and violations of copyrights and trademarks are common. Land rights are not well defined, especially in coastal areas, and 70 percent of all civil court cases involve property disputes.
Corruption is perceived as widespread. Albania ranks 105th out of 179 countries in Transparency International’s Corruption Perceptions Index for 2007, a very slight improvement over 2006. Corruption pervades all sectors and levels of government. Albania is a major transit country for the traffic in arms, narcotics, contraband, and people.
Rigid employment regulations impede development of a more vibrant labor market that could generate more productivity growth. The non-salary cost of employing a worker is high and dismissing a redundant employee is relatively costly. The high cost of laying off workers is a disincentive for companies that would otherwise increase employment.
