[ NATO COLLOQUIUM ]

Colloquium
1996


Panel II :

Living
Standards,
Social Welfare
and the
Labour Market

Income Policy and Labor Market Development in Albania: Some Distribution and Living Standard Implications

Marta Muo (a)

Professor, Department of Economics
University of Tirana, Albania

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Summary

The transition process of the Albanian economy bears some peculiarities due to its orthodox socialist legacy, the delay of initiation and the low level of incomes. In order to better evaluate the big changes in Albanian society, some very short general considerations on Albanian pre-reform conditions and on the early steps of macroeconomic reform are included in the introduction.

The wage policy, including its strategy and legislation, has been one of the main objectives of the Albanian transformation. The wage determination processes in the state sector and in the private sector have been subject to different regulations during transition. The wage situation in both sectors, and some results of wage policy, are described in the first part of the paper.

Income policy in Albania is being implemented simultaneously with endowment and development of the labor market. An overview of the unemployment situation, including major characteristics, is discussed in the second part of the paper. Some active labor market policies are also needed for dealing with the migration problem, both domestic and international. Income differentials that appear to be accompanying the transition process in Albania might contribute to a rise in efficiency and motivation, but also to growing inequality. Introducing a social safety net and a more social approach to development of the market economy in Albania is another challenging target of the Albanian transition program that will be summarized in the third part of the paper.



General Considerations on Economic Background

In passing through a very unique historical development, called by broad agreement in economic literature "transition", ex-Communist Central and Eastern European countries experienced an overall transformation of their societies. Aiming to set up market economies, much attention was addressed to the technical measures, such as macro-stabilization, inflation, privatization, price and trade liberalization. As time passes it becomes more evident that after emergency issues of transition, not only economic performance but also the human factor will be taken into account. Moreover, the social and individual costs of transition are substantial in determining the proper environment, credibility and acceptability of the ongoing economic transformation.

Compared to other Eastern European countries, the transition process in Albania carries some peculiarities due to its uncommon socialist legacy, delayed entry and the low level of income.

  • The Albanian economy has been extremely centralized (1) with virtually no private property and many structural misorientations (2) .

  • The most significant characteristic of Albanian pre-reform society is the extreme isolation from the rest of the world and the efforts to implement a self-sufficient economy.

  • The need for change was even greater in Albania than elsewhere in Eastern Europe, due to the severe economic crisis in the last days of the socialist system and the very poor inherited economic base. Being the poorest country in Europe, its population was more vulnerable to economic reform and to its costs as well.

As a result, all economic indicators in 1991 showed a deep crisis (see Table 1), in particular the budget deficit, GDP change, inflation, foreign debt and foreign exchange reserves. As GDP fell by 27.7% in 1991, the budget deficit accounted for 44% of GDP, broad money was around 70% of GDP, external debt was about $500 million or 30% of GDP and foreign exchange reserves were almost nonexistent, covering only 1.4 weeks of imports (3). Taking into consideration the above initial conditions, and following some attempts made during 1991, a comprehensive short and medium term economic reform program (4) started in mid-1992. This program aimed to initiate market economy reform by stabilizing the economy, liberalizing prices and trade, and also privatizing and restructuring state properties. Imposed by initial conditions, macroeconomic stabilization was the first step of Albanian economic reform which was directed toward:

  • Reducing the budget deficit by applying a hard budget constraint and tight credit policy,

  • Reducing and monitoring inflation through severe control on money growth,

  • Restrictive income policy,

  • Solving the foreign debt problem,

  • Introducing a floating exchange regime and keeping domestic convertibility of the Lek,

  • Creating a two tier banking system and a system of non-bank institutions,

  • Initiating a modern legal framework to establish a market economy,

Although it was inevitable, it seems that initially the program had few social components. The only one, on wage restrictions through ceilings, was thought to help in keeping inflation low. Meanwhile, price and trade liberalization that followed shortly, as well as privatization and restructuring, were expected to aggravate the income state of the Albanian population. Solving unemployment and reducing the social costs of transition very soon became a real challenge for Albanian transition. Introducing a package of social protection schemes during coming years was a clear goal for the democratic government. Creating proper institutions for implementing such policies was another ambitious target for the medium term program. Besides social security contributions (which already existed) new items such as unemployment insurance, social assistance and different compensations have appeared in the fiscal accounts of Albania since 1992. In addition, a package of laws regarding social protection was introduced (5). It seems that much progress has been made but still many unsolved problems are visible in Albania.

As time passes the role of human capital and its importance is becoming a priority of the overall transformation. Besides this is closely related to the credibility and social acceptability of the reform program, which means that it is directly determining the viability of the process. That is why it represents a topic widely addressed both by the literature and by decision and policy-makers. Actually in Albania, as the overall transformation progresses, the social components of economic reform are broadening significantly.

The goal of this presentation is to give an overview of some social and economic problems facing Albanian society. The first part will cover wage policies and their effects on this stage of Albanian reform. Because of its significant role, the unemployment level and related implications in the labor market will be discussed in the second part of the paper. Both topics have reached a certain point of development during the transition and have many distribution and standard of living implications which will be described in the third part.

Wages Policy: Strategy, Legislation and Implementation Result

Wage and income policies have an important role to play, responding to all changes in the Albanian economy, in particular to the social needs, and to introducing new incentives for efficiency. However, these policies reflected extensive new economic constraints and the very difficult macroeconomic position of the country in the beginning. Removing the old rules on wage regulation, the strategy aimed mainly at curbing inflation. The income policy is therefore considered in the government's short and medium term program as another important nominal anchor.

The wage reform (6) strategy was set up, as in other countries of Eastern Europe, on a tax-based system. This policy operated in Albania mainly in two variants: first, a direct control of the overall wage fund of the enterprise, and second, a control of the average wage of the enterprise. The former variant was applied in the first period from 1991 to 1992, substituted by the latter from 1992 onward. Keeping in mind the inflation target, reform of the wage system in Albania was determined by the difficult economic situation of the country, political solutions and the lack of a proper legal framework. Any change in wage policy, such as wage determination, wage increases and regulations, was accompanied by introducing a new law.

Implementing a new liberal strategy and new legislation on wage policy, some steps more political than economic started during 1991. Because of popular discontent, the government decided to increase all wages by an average of 50%, despite the negative effect on macroeconomic variables. The responsibility for wage determination was liberalized, as the Council of Ministers could decide only on the national minimum wage. With the Law on State Enterprises, no limits were put on wage levels, and non-budgetary enterprises established their wages in agreement with the trade unions and in accordance with the number of employees at the enterprise. The Law on Trade Unions confirmed tripartite negotiations as obligatory on setting wages, working conditions and living standards of workers. In a very difficult and confusing economic environment, new legislation and wage liberalization very soon turned out to be inflationary factors (7).

Consistent with stabilization strategy that started to be implemented under the program of the Democratic Government, the wage system was centralized, based on strict limits on average wage increases, with enterprises having to pay a progressive tax for any wage increase exceeding the limits (8). For the first time, different rules were introduced dividing the wage system in the state sector from that in the private sector.

Wage regulation in state enterprises had established a relationship of 1 to 4 between the lowest and the highest wage in an enterprise and it also limited the basic salary of the enterprise director. The Ministries established average wages for each of the enterprises under their supervision. The further decline in industrial output in 1993, and increasing social pressure as well, raised the need for more flexibility. For that reason it was decided to allow enterprises with good performance to raise the ceiling that was allowed in 1992 by 5% to 20%, and then, by mid-1993, to 30%. In 1995 this figure climbed to 70% showing signals of further decentralization. In many cases these profit-sharing schemes succeeded in improving workers' motivation and productivity, while in some other less profitable enterprises they had negative effects (9).

Furthermore, increasing incentives requires the introduction of wider pay differentials to stimulate skilled professionals to raise productivity and sustain the transformations. The cases when high-quality specialists leave state enterprises because of low wages and narrow differentials between skilled and unskilled workers are not unusual. It seems that this is a vicious circle which might be solved with the privatization and restructuring process. In the current stage, though helpful for stabilization, smaller differentials still provide serious barriers in introducing incentives.

Like most of the governments in Eastern Europe (10), while liberalizing prices during transition, no full wage indexation was introduced in Albania. However, wage indexation was carried out partially, but not on a regular basis, through various forms of compensation. Since 1992 wages have been increased 7-8 times, but only in 1994 did real average wages begin to show positive levels (see Table 2). It is clear that price liberalization had a significant impact on wage dynamics. Restrictive income policy and price liberalization caused real wages to fall significantly.

Used as an instrument to control state budget expenditures on wages and social protection, the setting of a minimum wage is considered as a very important limit in wages' calculation in Albania. A national minimum wage was used as the floor for the lowest wage of the tariff system in the state sector. Yet, it is considered mandatory for the private sector to protect the growing employees. The minimum wage helps to calculate social benefits for the low-income stratum of population. It has changed according to the decisions of the Council of Ministers, consistent with the macroeconomic policy and government programs (see Table 3). Nevertheless, in 1994, 8 percent of private enterprises and 6 percent of state enterprises in industry paid a minimum wage lower than the official minimum wage (11). One of the reasons might be the embryonic development of collective agreements and a very poor bargaining process in the labor market. Tripartite relations in Albania have a very short history and continue to be in the early stages, as the Trade Unions are still weak.

The intention to create an active labor market in Albania starts with non-interference in setting private sector wages. Indeed the state does not dictate wages in that sector, but it has determined a minimum wage on a national scale which is obligatory for all subjects, aiming to protect the employees. The interest for work in this sector is being promoted by paying high wages in comparison with state enterprises. The monthly wages of unskilled workers in the private sector are on the same level, or in many cases even higher, than in the state sector. Since the sector is new and the practice of wage determination is new, it tends to be oriented by wages in the public sector. They offer higher wages than the state sector, but they still apply similar schemes, profit-sharing rules and differentials between skilled and unskilled workers. In the private commercial enterprise "BESA" during 1994, the lowest monthly wage was 2500 leks. But due to combinations and links of remuneration, depending on the productivity with profit delivery, it came to 10,000 leks.

The wages at joint-venture enterprises are higher than the state enterprise level. Thus at the joint-venture "LORENCO-TIRANA" the lowest monthly wage is 4,000 leks and the highest 8,000 leks. In the joint-venture "AIDA-SPA", Durres, the wages are higher than 4,000 leks and the highest comes to 9,000 leks. In the joint-venture enterprise "KAM-TOYS" in Tirana the wages vary from 8,000 to 13,000 leks. In summary, the ratio of wages in the state sector to the wages in the private sector is approximately 1 to 3, causing a brain-drain from state to private enterprises. It should be noted that statistics and surveys on wage and income implementation policy in Albania are still very poor. It is quite clear that wages have become somewhat responsive to market forces. But what can also be clearly observed is that average wages are very low if compared to other countries in Eastern Europe (see Table 4). The increasing gap between wages in private and public enterprises can lead to a further disruption in production in some state enterprises, as they are losing trained workers. This means that the rigid tariff system must be gradually relaxed in the public sector and wage regulations be made more liberal in order to achieve sufficient motivation and productivity. A progressive increase of the minimum wage could effectively be used as a successful economic and social policy instrument to improve further living standards.

Labor Market Policies and Unemployment

It is very difficult to measure the development of the labor market in Albania in the absence of data on private sector activity. Also, the privatization of agriculture has made it difficult to determine the employment situation among the rural population, (which accounts for 750,000 people) and labor mobility between sectors. Total employment fell substantially from 1990 to 1993 (12). The state sector employment decreased by 50% in these three years. Consistent with the output pattern, the main decline was in industry, while the level in education and health was almost unchanged. The process of restructuring and reforming the state institutions made possible large reductions of staff in order to cut further government spending. The private sector, excluding agriculture, employed 124,364 people in 1994 mainly in trade and service sectors (13) which represented 8% of the labor force. This figure, however, should be treated as conservative, as many small firms do not report the real number of employees in order to reduce tax and insurance payments.

One of the so-called "costs of transition" - perhaps the most relevant - is high unemployment. Unfortunately, this phenomenon occurred in many cases in transitional economies accompanied by a sharp decline in production (14). This has been true for Albania too, especially up to 1993 (see Table 1). Privatization was certainly one of the main factors in creating unemployment shock, but a substantial role was also played by structural reform. Even with a signal of recovery in GDP growth during 1993, the new private sector was too weak to absorb the excess supply in the labor market. Meanwhile, the elements of collective bargaining are irrelevant and the proper legal framework which was initiated in 1993 has in practice not been introduced yet. The proper balance between stabilization measures and increase of efficiency in allocation of labor remains a challenge. However, recent official employment data show a continuously good improvement regarding the decrease of the unemployment rate (see Table 1 and 5). This is mainly due to the expansion of the private sector in the Albanian economy, in particular in trade and services.

Mainly as a result of the first waves of economic reform, the unemployment rate moved from 10% in 1991 to 25% at the end of 1992, with more than 400,000 people unemployed. Official statistics reported the unemployment rate for 1993 at near 20%. Some estimations show that the figure is smaller for 1994, (see Table 1 and 5) at around 18%, and 13% for 1995. Although Albania's ongoing economic reform has been successful, this unemployment rate remains one of the highest in Eastern Europe (15). The situation is more dramatic in the big cities of the country and in industrial regions of the northeast and central part, where the main industrial working force was located. Unemployment is widespread among people over middle-age, the poorly educated and women (see Table 6).

The first stage of the privatization process has brought important positive changes in the process of redistribution of national wealth. People benefited from privatizing houses, distributing lands and different compensations. Now the process will be deepened from voucher distribution in the mass-privatization program, while they have already received ownership of small farms. Sharing the opinion of Fisher (1993), it is true that privatization is the one reform that brings immediate benefit to consumers, but this is not true at the restructuring stage when unemployment is likely to grow. This is the real reason which may help explain why restructuring has been so slow. In privatized firms, the new owners, seeking greater efficiency, began cutting the excessive labor force. The objective of restructuring in the Albanian program of reform was to make SOE-s ready to privatize. In this sense it will assist and speed up the privatization process. Being "privatizable" first of all means managerial and financial restructuring. This measure results in a very costly and unattractive step, because it raises the "transitional cost" through unemployment. The social problems that accompany transitional unemployment shock could block the ongoing reform. That is why privatizing first and very fast was chosen as the proper strategy given the state of Albania's outdated industrial legacy.

It seems clear that a temporary trade-off between privatization and restructuring and employment surfaces. As privatization and restructuring become more intense, employment fell. But as the private sector of the economy expanded it could absorb the labor force supply better and keep unemployment down. That is true in the case of Albania, as the private sector expanded and unemployment fell (see Table 5). According to estimates of the EBRD, the private sector in Albania in 1995 covered 60% of GDP (16). Agriculture was the first to respond to the new situation, growing by 14.4% in 1993 and by 10% in 1995. The growth rate in construction reached a record of 31.5% during 1993 and another 15% in 1994 (17) due to private real estate construction. The new private transportation and other services, as well as over 50,000 registered trade companies, show an expansion and rapid development of private activity. The growing number of people employed in this sector is the first positive sign of the new emerging markets.

Observations and statistics of the transition period in Albania reveal another phenomenon: the share of the long-term unemployed (more than one year) is growing. At the end of 1993 there were 193,000 (64% of the total), while at the end of 1994 the number increased to 210,821 (80,5%). In 1995, it recorded a slight decline to 73% (see Table 6). The increase in long-term unemployment is an evident signal of the permanent versus the temporary one. In that way "transition unemployment" risks are becoming rather persistent and have all the characteristics of a stagnant pool. Moreover, as Boeri (1994) pointed out for other countries of Eastern Europe, the relative increase of private sector employment in Albania - it accounted for 117,000 people in 1995 (based on insurance statistics) - does not necessarily involve only outflows from unemployment but also hiring of new entries into the labor force.

Slow outflows and the rapid spread of long-term unemployment are the characteristics of labor market adjustment that might call for discretion in choosing the proper policies. Monitoring the dynamics of unemployment is more complicated than simply encouraging and keeping privatization or the restructuring process under control. The tax evasion tendency and informal activities make reporting difficult and private sector employment under evaluated. Active labor market policies are needed to reintegrate the long-term unemployed into the market. Stimulating investment behavior in the transition period and other more supply-side policies are needed to face the problem. These are the new post-emergency stabilization measures which were recently started in Albania. Retraining long-term unemployed people and preparing them for the new market environment is a practice that should continue extensively in the years to come. Another employment policy (Layard and Richter, 1995) could be the involvement of long-term unemployed in public works projects. Moreover, the establishing and improvement of Labor Offices and other new labor market institutions in both regions and the center could help the process.

The tendency towards long-term unemployment and its persistent character might imply a reduction of effective labor supply, increasing flows from unemployment to out of the labor force. However the reported labor force decreased in 1995, as people usually do not register as unemployed, or they work in the informal sector without being registered as either employed or unemployed. International and domestic migration also fuels statistical errors. A decreasing labor supply may reduce the pressure on the labor market, which is a serious obstacle to the expected recovery after sharp output falls. Self-employment is also a spreading phenomenon, but unfortunately no data is available.

As mentioned above, another factor that influences the reduction of the labor force supply is migration. Migration in Albania has an ambiguous effect. It serves to reduce the high social tensions in the current large unemployment, but it also tends to reduce the labor force supply. It accounts for 350,000-450,000 people, or more than one third of the labor force, working mostly in Italy, Greece and other European countries (18).

Initiated by popular unrest against the very low standard of living at the beginning of the 1990s, stimulated further by the ongoing privatization and its inevitable consequences, migration is having a strong effect on income distribution, on the labor market and on stabilization. It is not an unknown experience for Albania or other countries. These are some factors that induce pressure for a large migration in Albania:

  1. The dramatic demographic increase, an average 2% yearly for about two recent decades (19), has led to rapid labor force growth, especially in the young adult age groups, known to have the highest migration propensity.

  2. The economic reform, privatization and structural changes created the possibility for large unemployment that feeds migration, both internal and international.

  3. The openness of Albania to the world made it face increasing economic differentials, especially between industrialized and more developed neighbor countries. Increasing differentials in real wages and the standard of living should be expected to increase the incentives favoring international migration.

  4. In order to reduce social pressure, government decisions during transition (whether explicit or implicit) were directed to actively promote labor export as an important matter of economic policy.

The difficult transition in Albania is strongly sustained by the large inflows of private remittances and transfers from immigrants working abroad. Estimates show a number of US$ 200m in 1993 in the form of transfers, which account for 18% of GDP or half of the current account deficit (36% of GDP) in 1993 (20). They have contributed significantly in helping families to survive and to promote small businesses. The immigrants cash transfers from 1990 to 1994 were also the main source of cash in the informal and parallel foreign exchange market. Nevertheless the significance of this factor is decreasing, both because many of the workers started to get integrated in host countries or because others are coming back (21). According to some estimates, 1995 remittances covered 14% of GDP (22).

Some Income Distribution Issues and Standard of Living Implications

The transition period in Albania and the overall economic transformation are accompanied by many income distribution implications. These are connected with the depth of structural and systemic transformation, as well as the speed of it's reflecting the social welfare. It is quite evident that in Albania the availability of goods increased sharply as the market reform created unlimited possibilities for everybody to compete and raise their standard of living. In more than four years a growing number of Albanians live better than before.

Although the structural changes have begun, a great share of the working force in Albania - in 1995 around 265,000 people or 23.4% of the total employed - is still working in the public sector. Initially, income policy in this sector was followed by a large decline in real average wages, measured at nearly 40% relative to 1990. According to official estimates (see Table 2), after 1994 there occurred very good signs of increasing real average wages. This is due partially to GDP growth and decreasing inflation, but also to the continuous, yet irregular, nominal wage increase that constitutes the main part of incomes. As a result, GDP per capita (nominal, not based on PPP (23)) in 1994 measured US$ 550, and in 1995 a higher level of US$ 770 consistent with GDP increase. Compared to the initial situation in 1991-1992, this figure represents a three fold increase. Although the above progress represents an optimistic change, it still keeps Albania as one of the poorest countries in Europe.

The system of social protection in Albania has tried to reduce the unequal distribution of incomes and increasing poverty. Through the wage policy, the government has made serious attempts to adjust incomes for employees of the state and private sector. The official minimum wage has been increased several times (see Table 3) since April 1996, when it reached 4,400 Lek. Also, the Labor Code adopted in 1995 paved the way and provided the legal basis for the establishment of the subsistence minimum (24). A National Labor Council with representatives of employers, employees and government will be appointed to discuss labor legislation including the subsistence minimum . Although there is no official subsistence minimum, Independent Trade Unions of Albania (BSPSH) has made its own calculations defining the subsistence level at around US$ 60, but this has not yet been confirmed by the government (25).

The rate of unemployment remains a relevant factor that determines the low income level of the urban part of the Albanian population. Considering the stagnant situation of the unemployment pool and the Albanian peculiarities of income standards, the unemployment benefit system is likely to remain the most important labor market policy in the years to come. Unemployment compensation and the other forms of social assistance were introduced initially by the end of 1991 and revised during 1992 and 1993 (26). In 1993 the unemployment benefit increased by 4.2% of GDP, and together with social assistance accounted for 5.4% of GDP. As unemployment declined at the end of 1994 it accounted for 1.4% of GDP but social assistance increased to 2.5% (27). The duration of unemployment benefits is one year, in which earnings of the first six months are 70% of the previous wage, followed by 60% in the second half of the year. During 1994 around 20% of unemployed people received unemployment benefits, compared with about 27% in 1995 (see Table 6). The amount of unemployment benefits at the end of 1994 was 80% of the official minimum monthly wage.

It is obvious that privatization in Albania has its clear results in creating income differentials. The newly created private sector in Albania, although little data is available, has expanded rapidly. The positive impact of this reality is starting to provide stimulation of incentives to promote growth, orienting the labor market flow to more efficient private units. This is still embryonic, however, compared to the effects of state income policy in its large remaining sector. On the other hand, the evident income differentiation, in the background of the overall income decline, led to the rise of inequality.

Yet, both sides give different figures in the rural and urban zones in Albania. Regretably very little data are available (28). During the period 1991-1993, real incomes in the urban zone declined by 30% on average while the share of the urban population below subsistence income increased from 6% to 25-30% (29). Obviously this is connected with the sharp decline in industrial production, and in particular with the successive privatization of the urban sector. However, few private sector workers were believed to earn incomes below subsistence. Although we do not have estimates of employment or wages in the informal private sector, we can say that wages are lower than in the formal private sector. Part of informal sector employment corresponds to recipients of unemployment benefits, family self-employment, and second jobs of employees of the public sector.

The rural sector poses different figures and problems in income differentials in Albania. As some surveys estimate, real income in the rural sector increased by almost 50% between 1991 and 1993. This seems to have two main reasons:

  1. the early privatization process in agriculture and its fast supply response to the market;

  2. the very important role of transfers and remittances sent by family members working abroad.

However, the same survey points out that 485,000 people in the rural population live in poor conditions, while small farmers tend to produce for their own consumption rather than for the market. Rural regions are included in the social welfare scheme in Albania, but as in other similar cases (30), most of the rural population still has a natural safety net in the form of the household plot of land. Poor families, where possible, can rely on their own agricultural output to achieve the bare minimum of subsistence. Different distribution and social problems are accompanying development in this sector:

First, agricultural land per capita is scarce. Many peasants eventually find themselves facing a lot of difficulties in improving their living standards because production is limited. Despite improvements in the agriculture sector, there is nothing more to be expected from an economy limited to 1-2 hectares.

Second, there is a difference between different regions of the country, according to the quantity and quality of land distributed. The Northeast Mountain zone accounts for half of the incomes per family, compared to the other geographical regions, thus creating a big inequality.

Third, inequality of income distribution is also due to the access that farmers have to markets, since their choice is constrained. This situation stimulates spontaneous mass movement of rural families toward the more developed zones, near the markets and big cities, fueling unemployment, crime and other social problems. According to some surveys, the poverty in rural areas has increased, and 90% of farmers produce only at the level of subsistence or semi-subsistence.

Surveys and recent data point to another dilemma for Albanian transformation. Albania's extremely low income per capita makes its population particularly vulnerable to the costs of transition. These costs could be extreme without an effective social safety net program. The consensus for the reforms and political sustainability could easily erode. The initial success of the program in maintaining price stability and improving the financial situation might be threatened by poor development of the labor market and poor supply response, particularly in industry. To sustain, in the short term, the unemployment costs and the standard of living is a necessity for Albanian transition policies, and this is likely to prolong the time of the transformation. On the other hand, it is hard to face this burden on expenditures while the stability is still fragile and other urgent needs (e.g. investment in infrastructure, such as water and electricity distribution) and capital investments are necessary. By the end of 1993, unemployment benefits together with other benefits, compensations and social security payments had reached 14.8% of GDP. To stimulate an active labor market and replace the temporary, but absolutely necessary, social protection policy with an adequate and long term social safety net is an ambitious plan for Albanian reform, which might require more time than a medium term program.

A big problem to be faced is also the low level of incomes for retired people. The tendency to protect, as much as possible, the rights of the elderly is emphasized in social programs. Although it remains a priority for transitional income policy, the lowest level of pensions remains below minimum wages and also far below the subsistence minimum. According to INSTAT, the number of citizens receiving an old-age pension at the end of 1994 was 376,000, of which 65% live in the cities. From the total number of retired people in urban areas, about 63% received the official minimum retired pension, that is around US$ 25.

It is already evident that the social costs of transition are higher than expected. Higher social costs are primarily reflected in unemployment and they also increase poverty. But it is clear that unemployment is not the only, or the most important, cause of poverty. Even many poor people have a job or a pension and nevertheless live with very low incomes. Growing income differentiation has made the poverty deeper for a specific group of people, while creating extra wealth for others. Income distribution in Albania has become more unequal as the "winners" at the top (private entrepreneurs, professionals) have pushed ahead relative to the rest of the population. Informal and illegal activities, such as corruption and fraud, have also fueled inequality.

Concluding Remarks

Economic reform in Albania has been successful in its attempts to establish a market economy. Still, many unsolved problems and dilemmas are emerging. To choose the lowest social costs of transition remains one of the most difficult tasks to accomplish as living standards in Albania are low.

Strict and inflexible wage controls remain a crucial and controversial point of the stabilization program in Albania. This strategy helped in maintaining rigid financial control, but it also presents a clear obstacle in creating an active labor market and in creating incentives to promote growth. Although there are serious efforts to make the system more efficient, the proper balance is still unclear.

Unemployment might be considered as a strong determinant in the living standards and level of poverty in Albania. Decreasing unemployment through active labor market policies, and managing with domestic and international migration, remain important targets for the government in the future. A proper social safety net program and an active social protection scheme is likely to continue since the vulnerability of Albanians to the transitional costs is higher.

Notwithstanding, there are still many unsolved problems to face concerning living standard implications during the transition period in Albania. Taking into consideration differences among areas and groups of people, progress to date is very encouraging as a growing number of Albanians improve their economic situation.


Footnote:

  1. The opinions in this paper reflect the author's view and possible errors are her responsibility alone.
  1. For a detailed explanation see, for instance, Schnytzer, 1982 and Sjoberg, 1991

  2. The analysis of the pre-reform Albanian economy, in particular of its economic structure, as well as of the consequences of the overall isolation of the country can be found in Pashko, 1991 and Muo, 1994.

  3. Source of the macroeconomic data are mainly by the IMF Review 5, 1994, Washington DC. Data are provided also by INSTAT, Bank of Albania and Minstry of Finance.

  4. Transformation started by a one year emergency programm 1992-1993 followed by a medium term one 1993-1996. See, "Programi afatmesm i Qeveris pr zhvillimin ekonomik t Shqipris n 1993-1996", presented in Albanian Parliament on 24 November 1993 by Prime Minister Aleksander Meksi, Rilindja Demokratike, 26-27 November 1993.

  5. About unemployment benefit see Law No. 7703, 11.05.1993 and about economic aid see recommendation No. 9 of Council of Minister's Decision No. 605 of 31.12.1993.

  6. More details on wage reform can be found in: "Reforming Wage Policy in Albania", 1995, UNDP, ILO and Ministry of Labour of the Republic of Albania, Prepared for the Tripartite Conference 'Improving Wage Policy in Albania' held in Tirana, 1-3 November 1995.

  7. See: Kodra, 1995.

  8. The changes had a legal base in Law No.7582, 13.07.1992 and Law No.7583, 17.07.1992 on Competencies in Wage-fixing.

  9. Detailed analysis on this subject can be found in a survey described in Vaughan-Whitehead, 1995a.

  10. See, for instance, Vaughan-Whitehead, 1995b.

  11. See Kodra, 1995 and Vaughan-Whitehead, 1995a.

  12. Data on employment are from Institute of Statistics, Conjuncture: Main Economic Indicators, December 1995 and Ministry of Labor and Social Protection.

  13. Data are taken by INSTAT at the Directory of Taxes and Tariffs, Ministry of Finance and are different from data in Table 5 due to different reporting in order to avoid insurance payments. Figures in Table 5 are smaller because they take into consideration only insured people. Yet, unemployment data do not include the labor force that currently is working abroad.

  14. For more details on a comparative view see: Bruno, 1993

  15. See, Transition Report, 1995, EBRD.

  16. See Transition Report, 1995, EBRD, pg.11.

  17. Source: BoA, Monthly Statistical Report, January 1996, Tirana

  18. This is an estimate made by researchers, as official data never has been published. See for instance Misja, 1994.

  19. Statistical Yearbook of Albania, 1991, Tirana.

  20. See, Albania, IMF Economic Review, 5, 1994, Washington DC.

  21. In a survey conducted by the author during January 1996 on the development of the informal financial sector in Albania, in the framework of the project "Hidden Barriers to Economic Growth in Balkan Penninsula", financed by USAID on behalf of Albanian Center for Economic Research, the significance of immigrants remittances in the entrance of foreign currencies to Albania was ranked as less important than other factors.

  22. Source: Albania: Country Profile, presented at the 1996 EBRD Meeting in Sofia, 13-16 April 1996

  23. PPP stands for purchasing power parity. Estimates that consider PPP made by EBRD give GNP per capita as 999. To compute this estimate the country's nominal GNP per capita was divided by the "purchasing power parity", defined as the amount of the country's currency required to buy the same amount of goods and services in the domestic market as one dollar would buy in the United States.

  24. Subsistence minimum is discussed extensively in: Metohu and Kodra, 1995.

  25. For a further discussion see: Musaku, 1995.

  26. The Laws on the subjects are: Law No. 7579, 2.07.1992 and Law No. 7761, 9.02.1993 on some changes in the Law No. 7521, 30.10.1991 on Social Assistance for Those made Unemployed because of Economic Reform.

  27. Source: Ministry of Finance and IMF staff estimates.

  28. One attempt to measure income distribution and poverty during transition is made successfully in IMF, Review 5, 1994 by Caroline Van Rijckeghem. Another source was the survey carried out by INSTAT in August-October 1993 in urban areas of Tirana measuring living standards on the basis of expenditure rather than income, published in Statistika 5, 1994.

  29. Subsistence income, according to the study of Van Rijckeghem (1994) is defined as the cost of 2000 calories of food per day plus minimum necessary expenditures for a few other necessities (rent, housing and medicines) evaluated at urban prices.

  30. For a detailed comparative view see, for instance, Sachs, 1995 in his analysis of similar cases in East Asia where most of the population, as in Albania, lives in rural areas.


Tables:

Table 1 :
The Main Economic Indicators During Transition

Table 2 :
Minimum And Average Wages In Albania (% change)

Table 3 :
Minimum And Average Nominal Wage Increases At National Level, Albania

Table 4 :
Gross Monthly Wages In US$ In Eastern Europe (gross of income tax, net of social security tax)

Table 5 :
Employment in Albania, 1989-1995 (in thousands)

Table 6 :
Unemployment according to age groups, gender and education, end 1995


References

  • "Albania", 1994, IMF Economic Reviews, 5, July. Washington DC.

  • Bruno, Michael, 1993, "Stabilization and Reform in Eastern Europe: A Preliminary Evaluation", in: "Eastern Europe in Transition: From Recession to Growth", Blejer, Calvo, Coricelli and Gelb ed., World bank Discussion Paper, no. 196.

  • Boeri, Tito, 1994, "Transitional Unemployment", Economics of Transition, Vol. 2 (1), pp. 1-25, UK.

  • Fischer, Stanley, 1993, Comments on :"Privatizing Russia" by Boycko, Shleifer and Vishny, Brookings Papers, No. 2.

  • Kodra, Filloreta, 1995, "Wage Dynamics in Albania during the Transition" in: "Reforming Wage Policy in Central and Eastern Europe", Vaughan-Whitehead, D. (ed.), EC, ILO.

  • Layard, Richard and Richter, Andrea, 1995, "How much unemployment is needed for reconstructing?: The Russian Experience", London School of Economics, Discussion Paper No. 238, May 1995.

  • Metohu, Diana and Kodra, Filloreta, 1995, " Social Functions of the Minimum Wage" in ILO: "Reforming Wage Policy In Albania", Budapest, ILO CEET.

  • Misja, Vladimir, 1994, "Karakteristikat, motivet dhe tipet e emigracionit nderkombetar ne Shqiperi", Studimet e Popullsise, Bul.Nr.1, UT.

  • Muo, Martha, 1994, "Economic Transition in Albania. Progress and Problems", Working Paper 94-11, Dept. Of Economics. University of Delaware, USA.

  • Musaku, Fatmir, 1995, "Minimum wage and subsistence minimum" in ILO: "Reforming Wage Policy In Albania", Budapest, ILO CEET.

  • Pashko, Gramoz, 1991, "The Albanian Economy at the Beginning of 1990s" in: "Economic Changes in Balkan States", Sjoberg and Wyczan ed., St.Martins Press, New York.

  • Sachs, Jeffrey, 1995, "Reforms in Eastern Europe and the Former Soviet Union in Light of the East Asian Experiences", Studies&Analyses No.39, May 1995, Center for Social and Economic Research (CASE), Warsaw, Poland

  • Sjoberg, Orjan, 1991 "The Albanian Economy in 1980s: Coping with a Centralized system", in: "Economic Changes in Balkan States", Sjoberg and Wyczan ed., St.Martin Press, New York.

  • Schnytzer, Adi, 1982, "Stalinist Economy in Practice: The case of Albania" Oxford University Press, Oxford.

  • Transition Report, 1995, EBRD

  • Vaughan-Whitehead, Daniel, 1995a, " Wage Dynamics in Albanian Industry", in: ILO:"Reforming Wage Policy In Albania", Budapest, ILO CEET.

  • Vaughan-Whitehead, Daniel, 1995b, " Wage Policies in Central and Eastern Europe: In Search of Greater Social and Economic Effectiveness" in: "Reforming Wage Policy in Central and Eastern Europe", Vaughan-Whitehead, D. (ed.), EC, ILO.


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