BARRIERS TO ENTRY FOR NEW FIRMS
By Marsida T. Najdeni
Geographically Albania has a very strategic position; it connects East and West, Orient and Occident. It is considered a Southern European Mediterranean country, right between Italy and Greece. Albania was in total autarky until 1990. For half a century it was the most isolated republic in Europe. Outside citizens could not go in and no one could go out. First democratic elections were held in 1992 (1), thus ending one of the most horrifying dictatorships of the world. For 47 years Albania was a “self sufficient” country; meaning, it did not believe in trades and open market. The government was absolutely centralized, and it controlled every aspect of life. This attitude crumbled the Albanian economy into one of the poorest in the world. As the polish dissident Adam Michnik states, “The worst part of communism is what comes after it falls.” For almost a quarter century, since 1990 Albania has been struggling to come out of the ruins in which it was left by the totalitarian communist regime. The economical challenges during these long years are by far the hardest to overcome for such a small country.
Albania joined World Bank in 1992; it has received $1.8 billion in financing for various sectors (2). It joined World Trade Organization (WTO) in 2000. Projects from International Development Association (IDA), the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), International Monetary Fund (IMF) etc. are all in practice with Albania in order to help it to further advance economically.
From the CIA website in 2013 Albania had a GDP of $28.34 billion, but to be renowned is the fact that Albania has an informal GPD which is as big as 50% of the official GDP. In 2013 GDP per capita was as low as $10,700, and unemployment was as high as 16.9% (3). In 2012 14.3% of the population was living below poverty level. The cultural changes are having an impact in birth rates. If women before used to have an average of 3 children, now they have 1.5 children. Birth rate is at 12.73 per 1,000. Death rate is at 6.47 per 1,000. (3). The facts cannot hide the truth; Albania remains a poor country.
Albania’s foreign trade has been opened since 1990, and it follows the rules of the European Union and World Trade Organization. Some of the trade agreements that Albania is part of are, SSA (Stabilization and Association Agreement), which helps with the EU integration. CEFTA (Central European Free Trade Agreement), all the Balkan countries since 2006 have multilateral trade agreements among them. EFTA (European Free Trade Association), which is an FTA signed by Albania and EFTA countries, Iceland, Liechtenstein, Norway, and Switzerland. This agreement mainly focuses about the liberalization of trade in goods. FTAT (Free Trade Agreement with Turkey) all Albanian industrial goods exported to Turkey are free of tariffs. Agricultural goods for both countries have special tariff quotas. The U.S. Generalized System of Preferences (GSP) Program planned to encourage economic growth in developing countries by offering duty-free entry of up to 3,500 products from 128 countries including Albania & Kosovo (4).
Corruption remains one of the most problematic issues of Albania. As in all other ex communist countries Albania it’s not the exception. Actually, Albania is doing much worse in this matter than the other countries in the region. The 2014 Transparency International Index ranked Albania in the 110th position out of 174 (5). Neighboring countries such as Slovenia 39, Croatia 61, Italy and Greece both at 69, Serbia 78, are clearly doing better than Albania (5). Having such high levels of corruption new firms do not find incentives to open new businesses. Especially, it is hard to bring foreign investors inside the country with this kind of corruption figures. This past summer the Central Bank of Albania was involved in one of the worst corruption stories of it’s time. More than 6.5 million were stolen from the national vault. 20 employees of the Bank were arrested including its governor (6). The first priority of a country should be safeguarding the capital of a nation, by doing so it will give security to investors.
Poverty is another issue that Albania has been faced with in the past quarter century. In 2013 14.3% of the population was living below poverty line (3). This is a large number for a small country. Although income distribution is not as disperse as in a lot of other developing countries. The Gini Index of 2012 ranked Albania with a 29.0 point, which compare to other countries it is a good number (7). Half of the population of Albania lives in the rural parts making it harder for people to grow economically. The poverty rate in the mountain regions in 2008 was as high as 26.6% (8). Only 44.4% of children in Albania get to eat breakfast every day, in other words 55.6% of the Albanian kids do not get to eat breakfast on a daily base (8). This is shocking. If more than half of the children of one nation cannot have breakfast every day of their life, it is normal to assume that their parents are even worse. If these parents cannot feed their kids, for sure they cannot grow economically. Thus, this means that Albania doesn’t have the power to generate capital. Or, even worse, a very small number controls the capital of Albania. Diversification of the economy should be a priority for the Albanian economy.
Regulatory constrains are another barrier that new firms are faced with. For a country that only 24 years ago had no sense of a private sector it’s understandable to have a slow percentage of growing new firms. It is a mindset not only for the population, but for the government as well. In the U.S you can get a business license in days if not the same day. This is not the case in Albania. Due to dragging regulations and corrupted bureaucratic system to get a business license in Albania it can take even months. Translated by an economist this is purely loss of revenue. On paper it may look easy to get a business license in Albania. First, search for a unique company name at the National Registration Centre (NRC) agency. Second, request and obtain the Registration Certification and Unique Business Identification Number with NRC.Third, employee registration with the Employment Regional Directory at the State Labour Inspectorate agency. Fourth, registration with the Municipality Bureau of Internal Revenue agency. Fifth, Make a company seal at the Private seal-makers agency (9). Majority of the people that work in these offices ask for bribes in order to do their job. In a survey done with different firms the results are shocking. Table (10) below shows the results.
|# of responses||Minimum||Maximum||Average|
Time (months) required for completing the registration process according to sectors.
Financial system it’s even a bigger challenge. Foreign banks dictate the financial system of Albania. Banks denote over 90 percent of total financial system assets, corresponding to about 90 percent of GDP in 2012 (11). To understand how behind Albania is in the financial system one must acknowledge that the idea of an investment fund was only introduced in Albania in 2012. A German bank operating in Albania, Raiffesen Bank, was the first to form an investment fund. And as of October 2013 these banks had two investment funds in the amount of 316.7 million euros (11). As seen from the pie chart (11) below from the Bank of Albania and IMF the savings and loan system makes a small percentage of the total financial assets.
Savings and loans make up 0.8%. As small as it is there is a high percentage of loan outstanding’s. Graphs below show a clear picture of the situation (11).
Not only are Albanians not loaning to open new businesses; but also, when they do loan for household use they reach a loan outstanding as high as 70%. Nonetheless, Albania’s primary economic concern remains the high percentage of national debt. According to Standard & Poor unpaid bills to contractors are now estimated at 5.3 per cent of GDP, while the general government debt reached 67 per cent of GDP in 2013 (12). If a nation is struggling these much with their debt, no wonder why new firms have a hard time entering the market system.
These main issues tell a story of a country that is struggling. Also the story shows that this country is not willing to give up. No matter how hard it has been for Albania in this past quarter century it has shown a desire to move forward. Albania’s GDP in 2013 was much more improved than that of the 90s. The road ahead does not look easy for Albania; nonetheless, it looks better than the road it left behind.
- “Albania Profile.” BBC News.
- “Albania Overview.” World Bank.
- “The World Fact book: Albania.” CIA.
- “Trade Agreements.” Albanian Investment Development Agency (AIDA)
- “How Corrupt Is Your Country?” 2014 Corruption Perception Index. Transperancy International
- Koleka, Benet. “Betting the Bank: The Albanian Gambler Who Robbed the National Vault.” Reuters. Thomson Reuters, 08 Nov. 2014.
- “Gini Index.” World Bank.
- “Child Poverty In Albania.” Observatory For Children Rights. Supported by UNICEF. June. 2013.
- “Starting A Business in Albania.” Doing Business – World Bank Group.
- Balcerowicz, Ewa. Leszek Balcerowicz. and Iraj, Hoshi. “Barriers to Entry and Growth of Private Companies in Poland, the Czech Republic, Hungary, Albania and Lithuania. Warsaw: Case, 1998. P, 257. Print.
- “Albania: Financial System Stability Assessment.” International Monetary Fund. 14 Feb. 2014.
- Likmeta, Besar. “Standard and Poor’s Upgrades Albania’s Debt Rating.” Balkan Insight. 14 Apr. 2014.