Institutions Matter a Qualitative Case Study Analysis of the Institutional Capacities of Albania in Relation to the Utilization of the EU Funds

STOCKHOLM UNIVERSITY Department of Economic History and International Relations Master's Thesis in International Relations with specialization in Global Political Economy Spring Term 2021

Student: Ardit Hysa Supervisor: Akhil Malaki

Institutions matter A qualitative case study analysis of the institutional capacities of Albania in relation to the utilization of the EU funds.

Keywords: New Institutional Economics, Albania, Accession, Informal Institutions, Kanun, EU funds

Abstract This dissertation is a case study of Albania regarding the influence institutions have over the utilization of the EU financial aid, more specifically, the Instrument for Pre-accession Assistance II (IPA II) for the period of 2014-2020. Albania has been struggling with EU accession despite the allocation of numerous funds in the form of development programs for several years. The study attempts to identify the endogenous obstacles to development and the utilization of funds due to both formal and informal institutions. The reviewed literature shows a clear correlation between economic growth and good quality institutions. Besides, it indicates that informal institutions play a major role in the development process. Therefore the role of the Kanun in Albania is examined. As defined by mainly Douglas North, the New Institutional Economics theory is used to dive into Albania’s formal and informal institutions and discover how those determine the politico- economic and social structures. Semi-structured interviews were conducted with nine key participants who work in IPA II projects at the local level across the country. The country was divided into three regions in order to identify variations in the role of IPA II funds, institutions, and degree of development. Before the analysis is done and the results are presented, the historical background of the three key historical periods of the country, Ottoman, Communist and Democracy, is provided to set the base of the origin of present institutions. The results from the interviews and the macro-economic indicators of the three regions show a correlation between good defined formal institutions and economic growth and strong informal institutions and stagnation, as the theory suggested.

Table of Contents 1. Introduction ...... 6 2. Background ...... 8 3. Research Aim and Research Questions ...... 10 3.1 Problem definition ...... 10 3.2 Purpose ...... 11 3.3 Research Question: ...... 11 4. Earlier Research ...... 11 4.1 Institutions and economic growth ...... 11 4.2 Property Rights in Albania and the Kanun ...... 14 5. Theory ...... 15 5.1 New Institutional Economics ...... 15 5.2 Formal and Informal Institutions ...... 16 5.3 Institutional change ...... 17 5.4 Institutional framework of analysis...... 18 5.5 Operationalizing the analytical framework ...... 19 6. Methodology and Methods ...... 20 6.1 Methodological Approach ...... 21 6.2 Interviews ...... 22 6.3 Limitation ...... 26 7. Three different historical periods ...... 27 7.1 First historical period: Ottoman Empire ...... 28 7.2 Second historical period: The Communist Regime ...... 30 7.3 Third historical period: Democracy ...... 32 8. Empirical Analysis ...... 33 8.1 The Instrument for Pre-accession Assistance funds...... 34 8.1.1 Instrument for Pre-accession Assistance II Strategy Paper ...... 34 8.1.2 Consideration of institutional framework ...... 35 8.2 Interview Analysis ...... 38 8.2.1 Key Indicators ...... 38 8.3 Regional Accounts ...... 48 9. Discussion...... 52 10. References ...... 56 11. Appendices ...... 64 Appendix A ...... 64 Appendix B ...... 65

Appendix C ...... 66

List of Tables: Table 1 NUTS units’ classification ...... 20 Table 2 Method of selection ...... 24 Table 3 Indicative Allocation, million in Euro per policy areas and sectors ...... 35 Table 4 Point system on key indicators placing the regions on the institutional matrix ...... 47

List of Figures:

Figure 1 Simplified combination of formal and informal institutions...... 18 Figure 2 The methodological approach ...... 22 Figure 3 Random selection of counties using SQL ...... 23 Figure 4 Institutional influence during the Ottoman period ...... 30 Figure 5 Institutional influence during the Communist period ...... 32 Figure 6 Colored map of Albania showing on a grade from 1 to 10 the institutional capacity building and the overall success of IPA II according to the Interviewees ...... 46 Figure 7 Institutional setting during IPA II, 2014-2020...... 48 Figure 8 Graphic illustration of Gross Domestic Product per Capita, in Euro by County & Region, 2014-2018...... 49 Figure 9 Gross Domestic Product in million Euro by Region, 2014-2018 ...... 50 Figure 10 Average Gross Domestic Product per Capita, in Euro by County, 2014-2018 ...... 51 Figure 11 Average Growth Rate percentage of GDP by county, 2013-218 ...... 51

Table of Abbreviations APL Albanian Party of Labor CARDS Community Assistance for Reconstruction, Development CBC Cross-border-territorial cooperation COMECON Council for Mutual Economic Assistance EC European Commission EU European Union GDP Gross domestic product INSTAT Institute of Statistics (Albania) IPA Instrument for Pre-accession Assistance IPA Instrument for Pre-accession Assistance LAU Local administrative units NGO Non-governmental organization NIE New Institutional Economics NUTS Nomenclature of territorial units for statistics PHARE The Poland and Hungary: Assistance for Restructuring their Economies PRAG Practical guide on contract procedures for European Union external action SQL Structured Query Language UNDP United Nations Development Programme ODIHR Office for Democratic Institutions and Human Rights

1. Introduction

Just a few years after the independence from the Ottoman Empire, in early 1920s, Albania was going on through cultural emancipation, land reform, and polarization between the old norms and the modernization of the state apparatus. Inspired by the events and the political struggle of that time, Faik Konica, an important Albanian intellectual, wrote and published a long satirical prose called “Doctor Needle”. The hero of the prose is a young Albanian doctor with Western values who, after his studies in Sweden, decided to return to Albania to help with the modernization of the country (Konica, 2011). One of the first people the Doctor met upon his arrival was a policeman who offered him help and some advice on how to do business in Albania.

Dear Doctor, you firstly need to understand well two things on how to conduct business in Albania. First, nobody accepts bribes in this country. Second, here everyone expects gifts…. So, dear Doctor, in a country where no one accepts bribes, but everyone expects gifts, how can one do business? To give to everyone is impossible; to give no one is madness.… The solution is to give only to some. But to whom? (Konica, 2011 as cited in Gjevori 2018, p. vii)

The officer’s monologue continues by implying that the only institution that is persistent through the change of time, leaders, and regimes in this country is that of conducting business based on the informal institutions of honor by using parallel channels to the state. Almost a century later, the widespread pandemic of the early 1920s is not the only similar characteristic that period has with the present situation in Albania. This abiding condition in the social and political life in the country raises the debatable question of what is the best way to offer help to an underdeveloped country in order to achieve economic and social development.

From the mid-twentieth century, the international community offering development assistance to underdeveloped nations followed a notion of development based on economic growth. This idea of development was a reflection of the dominant theory of that time, modernization, which perceived the transition from a pre-industrial stage to industrial society as an “inevitable international historical and unidimensional process which all societies undergo at different times” (Menzel, 1990, p. 45). Rostow (1990) describes the development process as a series of linear incremental stages which transform traditional to modern consumer societies.

Consequently, development meant the allocation of capital, skills, and values from the developed to the underdeveloped world (Hardiman and Midgley, 1982, p. 52).

Despite tremendous amount of money being allocated towards underdeveloped countries, economic and social stagnation continue to persist. Many analysts cited in Alesina and Dollar, (2000) claim that a large portion of foreign aid allocated from developed to developing countries is not utilized but instead is wasted on unproductive public consumption. Most of the scholars claim that the reasons for this are: “poor institutional development, corruption, inefficiencies and bureaucratic failures in the developing countries” (Alesina & Dollar, 2000, p. 33).

It was in the mid-1990s when the World Bank and the United Nations Development Programme (UNDP) shifted their approach from a neoliberal narrative with emphasis on small states influenced by the Washington Consensus to a more state-centered approach where institutions started to matter for development. This paradigm shift can be noticed by the several publications from both the World Bank (World Development Report 1997 and World Development Report 1999/2000) and UNPD (Human Development Report 1990, Human Development Report 1995, and Human Development Report 2000). These reports present a new prescription of policies that goes beyond neoliberal orthodoxies emphasizing on New Institutional Economics (NIE) and capabilities (World Bank, 1997; 1999/2000 and United Nations Development Programme [UNDP], 1990; 1995; 2000). The World Bank argues that these shifts happened because “good macro policy is not enough; good institutions are critical for macroeconomic stability in today’s world of global financial integration” (Burki & Perry, 1998, p. 3).

This thesis is inspired by the institutional analysis developed by Ronald H. Coase, Douglass C. North, and Oliver E. Williamson, claiming that institutions matter when examining the economic performances of a country over time. The research will focus on the endogenous obstacles due to formal and informal institutions that make foreign assistance ineffective in Albania. First, I will provide a brief historical background of Albania in the context of institutions and aid. The background journey will lead us to the problem statement, purpose, and research question of this thesis. Then, a review of the earlier research in the field NIE will be offered in connection with the case of Albania. From this review of earlier research, some departure points will be drawn to develop the theoretical framework for this study. Next the methodology and methods will be explained where I discuss how, why, and what data will be

7 gathered and analyzed. Afterwards, a brief historical background of the three main historical period of Albania will be presented in order to offer a better understanding to the reader on how the institutional frameworks has historically evolved in the country and its influences. The analysis of the empirical data follows which leads to a discussion where the major findings are summarized, and interpretation and implications are discussed.

2. Background

Albania's current underdeveloped situation can be tracked back to the post-World War II time when all the Western European countries were rebuilding their economies with the help of the Marshal Plan. Albania's dictator, Enver Hoxha, during that period, cut almost all international relations and withdrew the country from the international economic system and international institutions (Johnson, 2001, pp. 172-3). According to Lavigne (1961), the only international relation Albanian had was the membership in the Council for Mutual Economic Assistance (COMECON) created by Stalin as a response to the Marshall Plan. In 1961, Albania withdrew from COMECON due to the Sino-Soviet dispute while siding with China. During the Sino- Albanian relations (1961-1978), "China prioritized Albania as a recipient of foreign aid, and no other country in times of peace received from China such economic and military assistance, proportionate to population, as did Albania" (Marku, 2017, p. 4). After the breakup with China, Albania was in total economic and political isolation. Characterized as one of the most isolated countries in the world (Austin & Ellison, 2008).

In 1991, Albania became a democracy and began its new political and economic journey towards integration into the international community. Derek Hall describes this shift as a jump from "isolationism" to "flexible pragmatism" driven by the need for economic and technical assistance and the hope to be accepted by the international community and more specifically the European Union (Hall 1994, p. 185). Since 1991, with the opening up of the economy, Albania has received a great deal of foreign aid, mostly from the European Union (EU) (Johnson, 2001).

Although, the Communist legacy did not only leave economic and technological obstacles in the post-Communist period but also psychological effects such as the feeling of inferiority. Derek Hall (2001) claims that the sudden revelation of the global scene in 1991 deeply affected Albanians. After forty-five years of isolation and constant self-aggrandizing propaganda they realized that the country was impoverished and inadequate. He continues by writing that:

Albanians' sudden subjection to the reality of their relative position drastically changed their self-image and consequent collective patterns of behavior. The impact of this denouement was further reinforced by the domestic vacuum brought about by the lack of a tradition of pre-war democratic institutions and civil society compared to most of the rest of central and eastern Europe (p. 110).

Nevertheless, it was not only the communist past that left physical and psychological trauma on the nation but also the four centuries of Ottoman rule. Hall (2001, p. 108) claims that the Ottoman presence in Albania since the fifteenth century is responsible for the "backwardness and cultural hostility which precluded access to the agrarian and industrial revolutions of the West." The study will elaborate further on this period on chapter 7.1.

Taking into account all the above, this study argues that the obstacles to the utilization of foreign aid to achieve economic growth are in the inherited (informal) institutions from the Ottoman and Communist past, which have created a tolerable environment for inefficient institutions and problematic rule of law. Douglas North argues that formal institutions are essentially established by the informal rules, and the two of them develop within the operations of organizations. Besides, he also claims that history matters for the formation of the existing institutions, and both the current formal and informal institutions provide a structure that affects the directions and pace of economic development of a nation (North, 1990). Boettke et al. (2015, p. 332) highlight the notion of path dependence developed by North (1990), which says that current institutions “tend to lock in particular institutional arrangements that have emerged in various places for unique historical reasons.” They argue that in order to get out of that dependency path there is need for an exogenous input such as aid to push the agents into a new, improved institutional framework (Boettke et al., 2015, p. 332). Since the fall of the Communist regime, a major exogenous force and ally to economic and social development of Albania has been the European Union.

Since 1991, Albania has been the recipient of large amounts of foreign aid, mainly from the EU, in the form of development programs. During the period 1991-2000, the EU allocated a total of € 620.7 million through the PHARE1 Assistance program. These funds focused on reinforcing democracy and the judicial system, establishing an efficient civil service, and

1The Poland and Hungary: Assistance for Restructuring their Economies (PHARE) program was created in 1989 under Council Regulation (EEC)No 3905/89 (OJ L 375, 23.12.1989) in order to support the Central and Eastern European countries to join the EU. The program extended also to Bulgaria, Czech Republic, Slovakia, Romania, Albania, Estonia, Latvia, Lithuania, Bosnia-Herzegovina N. Macedonia.

9 develop infrastructure (European Commission, 2000). Although, in 2001, the European Court of Auditors special report declared that the EU funds to Albania had been not effective due to mismanagement of funds and lack of coordination with the European Commission (European Court of Auditors, 2001).

PHARE program was replaced by the Community Assistance for Reconstruction, Development (CARDS), during which a total of € 320 million were allocated from 2000 to 2006 in Albania, focusing on “justice and home affairs,” “administrative capacity building,” “economic and social development,” and “democratic stabilization” (Council Decision, 2008, p. 9). Nevertheless, the post-evaluation report showed that the CARDS assistance program needed improvement in local ownership, absorption capacities, time planning, and coordination between European Commission (EC) and Albanian institutions (Council Decision, 2008)

In 2007 the Instrument for Pre-accession Assistance (IPA) replaced CARDS. The IPA program ran between 2007-2013, allocating € 306 million in Albania with the intention to progressively align the country with the EU standards and policies in order to prepare to join the EU. The main focus of IPA assistance was on institution building and meeting the political criteria, strengthening the rule of law, human rights, public administration, protection of minorities, anti-corruption policy, and economic and social development (Council Decision, 2008).

When IPA I program ended, in 2014 Albania secured a funding allocation of €639.5 million under the IPA II program for the period 2014-2020, with the majority of funds going to democracy and governance and the rule of law (European Commission, 2020).

3. Research Aim and Research Questions

3.1 Problem definition Almost thirty years after being a democracy and despite the massive allocation of funds and clear instructions, Albania has not fulfilled the pre-condition grading EU accession, and the level of Central Government debt has increased up to 75 percent (European Commission., 2014). It seems there might be an endogenous issue (due to institutions) with the utilization of the European funds towards the country – which is the problem I intend to address in this thesis.

3.2 Purpose The purpose of this thesis is first to assess how the institutional capacities of Albania affect the utilization of the EU Pre-Accession Assistance II funds, and secondly to identify the endogenous institutional obstacles to economic and social growth.

3.3 Research Question: How the institutional capacities of Albania affect the effective absorption of the EU Pre- Accession Assistance II funds for the period 2014-2020.

4. Earlier Research

In this chapter, I will provide some previous research claiming that institutions play a key role in the formation of economic behavior and economic performance. This early research will give us some further context on the topic, and finally, I will use it later in the discussion section.

4.1 Institutions and economic growth There is an immense literature in development economics and economic history claiming and demonstrating that institutions matter for economic growth (Scully 1988; North 1990; Boettke, 1994; Hall and Jones 1999; De Soto 2000; Acemoglu et al. 2001, 2002, 2005; Acemoglu & Robinson, 2012). This scholarship argues that there is an obvious correlation between long-run economic growth and good quality institutions such as the rule of law, clearly defined property rights, financial markets, and liberal democracy.

Demonstrating the impact institutions have on different nations in a historical context between developed and Third World countries, Douglas North claims that the institutional framework is the main element leading economies to success, both cross sectionally and over time (North, 1990, p. 69). Consequently, he points out that "the inability of societies to develop effectively, low-cost enforcement of contracts is the most important source of both historical stagnation and contemporary underdevelopment in the Third World" (North, 1990, p. 54). On economic performance, North claimed that institutions have not been efficient but rather have prevented economic growth with the exception of the kind of institutions that developed in the Western world. Overall, North argues that institutions create a systematic arrangement in society by reducing uncertainty, determining transaction and production costs. This arrangement provides the necessary incentives to ensure economic activities' profitability in a structured economy (North, 1990, pp.107-117).

On the reasons why the Western world and some of their former colonies developed more than other countries, Gerald W. Scully (1988) claims that it is the choice of the institutional framework that allows a broad freedom for "individual initiative, choice, and responsibility" that lead to economic growth. He argues that after World War II, the rise of nationalism and the independence movement gave the possibility to many new countries to choose between institutional framework that promotes individual initiative, democracy, and the rule of law or institutions that hold back political and civil liberties (Scully, 1988, pp. 652-3). Since nations establish the "rules of the game" for individual actors to make choices, then the institutional framework's selection determines the efficiency in the economy of the nation (Scully, 1988, p. 654).

To support his claim, Scully does a regression analysis of the effects of institutions on economic growth in 115 market economies over the period of 1960 to 1980. The study measured the correlation between growth rates of real domestic product per capita and economic efficiency with political, civil, and economic liberty (Scully, 1988, pp. 657-660). The empirical data showed that the country's institutional framework has significant effects on the efficiency of economic growth. Societies that commit to the rule of law, private property, and the allocation of resources in the market have three times larger growth and are two and a half times more efficient than societies that lack freedom (Scully, 1988: 661).

Acemoglu's and Robinson's book Why Nations Fail (2012), after providing many historical examples and comparing economies, argues that the reason why nations fail is not as believed by other authors due to geography, bad policies, or value systems but rather due to the political institutions that determine economic institutions. They write that "nations fail when they have extractive economic institutions, supported by extractive political institutions that impede and even block economic growth" (Acemoglu & Robinson, 2012, p.83).

Furthermore, the authors claim that for an economy to have growth there is need for centralized political institutions that provide basic public services such as the rule of law, enforcement of contracts, and education. When these are covered, then inclusive institutions create innovative incentives that lead to continuing growth. On the contrary, extractive institutions might deliver growth initially, but ultimately, they will fail. The authors' formula for success is: inclusive governments and institutions lead to prosperity, growth, and sustained development; extractive governments and institutions lead to poverty and economic stagnation (Acemoglu and Robinson, 2012)

Glaeser et al. (2004) provide three main measures of institutions gathered from the recent economic growth literature:" risk of expropriation by the government, government effectiveness, and constraints on the executive" (p.4). Acemoglu, Johnson, and Robinson (2005) have constructed a general method of testing this assumption derived from modern economic modeling and econometric hypothesis testing. To measure the current institution, they set a variable which they call protection against expropriation risk. Their results show a statistical relationship between high quality institutions (which is protection against the risk of property rights) with higher income (GDP per capita) (Acemoglu et al., 2005, pp. 402-3).

Although, they mention that these results could be due to reverse causation or omitted variable bias. These kinds of issues indicate a fundamental problem of causality in this area of analysis. To overcome this issue, the authors chose a variable from the early days of colonization (settler mortality) of the modern economies. This exogenous variable from the past could be used as a connecting point for the current institutional variables in the same countries and build a relationship between the current institutions and colonial institutions. The two-stage regression analysis results show that institutions have a highly significant influence on the modern cross- country differences of income (Acemoglu et al., 2005, pp. 417-421).

It is evident from the literature that most of the empirical evidence is based on formal rules of institutions. The key instrumental variables are set in accordance with geography, log GDP per capita, and colonial and pre-colonial history. For example, Acemoglu, Johnson, and Robinson (2005) used measures based on countries' colonial past to evaluate specific institutions. Despite being mentioned that informal institutions play an important role in shaping formal institutions, there is a shortage of research focusing on the effects of them on economic development.

Pande and Udry (2005, p. 2) highlight the difference between "de facto" and "de jure" institutions. They argue that many times institutions are not designed, but even when they are, their function is different from what was originally planned. To support their claim, they highlight property rights in four African counties (Gambia, the Democratic Republic of Congo, Ghana, and Ivory Coast) that scored the best and worst in expropriation risk index used by Acemoglu, Johnson, and Robinson (2001). They observed that "the use of almost all land in these four countries is governed by customary tenure arrangements, not formal sector rule." (Pande and Udry 2005, p. 14)

Granville and Leonard (2009) performed an analysis on the impact informal institutions have on the transitional economy in Russia, where new institutions are replacing old ones. They

13 found out that there is an uneven transition due to the domination of informal institutions in some regions. The authors examine the role played by the local protection of property rights and the absence of federal laws and regulations that lead to this uneven development. They argue that for the transition to be successful depends "on the informal enforcement of the formal institutional environment" (Granville and Leonard, 2009, p. 166).

4.2 Property Rights in Albania and the Kanun During communism in Albania, private property rights were abolished. The process of decollectivisation began with the Land Reform Law in 1991. The method used to redistribute the land was by electing a land commission which would set the original (pre-Communist) boundaries of the village or area, and then the aggregate land area would be divided by the number of people in the village. All previous ownerships were revoked, and the allocation of land parcels was conducted by lottery. This technique worked well in some areas like the southern part of Albania, where collectivization was done early in the 1950s, and most of the land did not belong to the villagers but to large landlords. However, the states’ plan to redistribute the land in the mountainous northern part of Albania was impracticable. The houses in the area are surrounded by the land, and the pre-Communist ownership was still well remembered due to the late collectivization (1966-7). In pre-Communist northern Albania, social behaviour and property rights were regulated by customary law dictate known as Kanun (De Waal, 2004). The Kanun is an ancient Albanian informal legal and moral code (Schwegler & Smith, 2012). During communism, the Kanun was prohibited due to the fact that a core element of it is the “inviolate nature of private property” and because it was associated with the regions that resisted most the Communist movement (De Waal, 2004, p. 25). Acknowledging the strength and influence the Kanun had, the Communist regime outlawed and punished any reference or practices of it. Clarissa de Waal (2004) claims that, despite the Communist ban, the Kanun law persisted in the area of northern Albania, and it was still discussed in the 1990s. Consequently, the decollectivisation of cooperative land in the area of northern Albania took the “form of restoring pre-Communist hereditary boundaries, following the procedures laid down by the Kanun - the body of customary law used throughout the mountainous north prior to the advent of communism” (De Waal, 2004, p. 30). Taking into account the earlier research discussed above, it is clear that there is an association between informal institutions and acceptance of new growth-igniting institutions in a transitional economy, which is quite overlooked in the literature. Thus, the focus of this study

14 will not only be on formal institutions but also on informal ones. In addition, the study attempts to investigate how the Kanun affects the incorporation of new institutions in the sector of property rights and the rule of law generally –i.e., the role of informal institutions in institutional change.

5. Theory In this chapter, I will outline the theoretical framework of this study. As a basis of my analysis on the institutional capacities of Albania to effectively use EU funds, I will first define institutions and institutional change, and then a theoretical framework will be developed. My focus will be on Douglas North’s work since he is looking at institutions from a macroeconomic perspective and links them to economic growth and development. According to Ménard and Shirley (2014), North’s work built a new worldview for many economists and economic historians, where they shifted their view on development from economic growth due to technology and capital accumulation to a dynamic institutional change method.

5.1 New Institutional Economics North defines institutions as “humanly devised constraints that structure political, economic and social interaction, consisting of both informal constraints and formal rules, which have been used to create order and reduce uncertainty in exchange” (North, 1990, p. 3). For North institutions are the “rule of the game” and the players whose aim is to win the game are called “organizations.” By organizations, he means groups of people who collaborate in order to achieve goals. These groups are political bodies, economic bodies, social bodies, and educational bodies (North, 1990, pp. 3,5). This sports metaphor means that institutions set constraints on human interactions. Even though rules and constraints mean limitations and restrictions, North sees these constraints as incentives for individuals to act, seize opportunities, and make choices that would not exist otherwise (North, 1990). Hodgson elaborates clearly on what rule-constraints mean by giving example rules that regulate everyday affairs. For example without the rules of a language, we would not be able to communicate. Thus he believes that “regulation is not always the antithesis of freedom; it can be its ally” (Hodgson, 2006, p. 6). Nevertheless, Hodgson disagrees with North on the distinction between institutions and organizations since rules apply within organizations, organizations must be considered a special kind of institution (Hodgson, 2006, pp. 7, 10).

Scott’s definition of institutions is: “Institutions consist of cognitive, normative, and regulative structures and activities that provide stability and meaning to social behavior. Institutions are

15 transported by various carriers, cultures, structures, and routines and they operate at multiple levels of jurisdiction” (Scott, 1995, p. 33). Despite his rather broad definition, the analytical framework can be divided into three dimensions, (1) the three types of institutional elements (cognitive, normative, and regulative), (2) the transportation means (cultures, structures, and routines), and (3) the level of operation (micro or macro-level). Therefore, these formal and informal rules do constrain not only actors but also create a cognitive system that determines the choices of the actors. Hall and Taylor (1996, p. 15) claim that institutions are not responsible only for the actions of a person but also, they influence the imagination of what that person thinks that can do in a given context. When an actor is faced with a decision-making dilemma, he or she will look for the appropriate behavior, and what is considered appropriate for a person in a given moment is determined by the political and social institutions that are inherited through social interaction (March and Olsen, 2010, p. 23).

Williamson (1993) proposes a three-level scheme where governance is in the center and has both macro (institutional environment) and micro (individual actors) influences. On the top is located the institutional environment, which is responsible for the shift parameters that affect the comparative costs of governance, and on the bottom is the individual’s behavioral assumption. All three elements in the scheme interact with each other both ways. For example, as already mentioned, the institutional environment sets the rule of the game, and this means that if changes in formal laws, norms, customs, and comparative costs of governance happen, then a redesign of the economic organization is hinted (Williamson, 1993, p. 80).

Having in mind the three-level scheme, Williamson argues that adaption is the main issue of economic organizations. Complex governance structures are proper for complex organizations with complicated transactions involving risky contractual relations, while simple governance structures are suited for a simple transaction. Although having a simple governance structure will not work for a complicated transaction and the opposite. Therefore, he stresses the importance of both autonomous and cooperative types of organizations and argues that “each generic form of governance-market, hybrid, and hierarchy differs systematically in its capacity to adapt in autonomous and cooperative ways” (Williamson, 1993, pp. 83-4).

5.2 Formal and Informal Institutions North points out the distinction between formal rules and informal constraints. Formal rules are written laws, judicial rules, contracts, and constitutions, whether informal constraints are norms and conventions or self-imposed codes. Both formal and informal institutions determine the incentive structure of societies (North, 1990). Although, the line separating formal and

16 informal is blurry and, for analytical reasons, needs to be determined precisely. In practice, though is difficult since, as already mentioned the section 3.1, there is a difference between de facto and de jure institutions. Hodgson claims that the distinction between the two is not clear enough and he suggests the two terms to be “abandoned” and instead uses terms like “legal, non-legal, and explicit instead” (Hodgson, 2006, p. 13).

As an alternative, in the field of anthropology, Francis Cleaver (2002) suggests replacing the term formal institutions with “bureaucratic institutions” and informal institutions with “socially embedded institutions.” She claims that bureaucratic institutions are formal agreements based on legal rights, usually indicated by governments or development agencies. While socially embedded institutions are based on culture, customs and norms and are incorrectly called “informal” (Cleaver, 2002, p. 13). She continues arguing that ‘bureaucratic’ institutions may be, but not necessarily ‘socially embedded’, and norms and customs can go through a process of bureaucratization too (Cleaver, 2002, p. 13).

Neither Hodgeon’s nor Cleaver’s definition brings light to the blurry line distinguishing formal and informal institutions. North (1990) points out that formal and informal institutions become complementary and that formal institutions are the evolution of informal ones. In addition to the complementary relationship, Lauth (2000, p. 25) adds two more types of relationship between formal and informal institutions, the “substantive type” where either formal or informal institutions are effective and functional in relation to each other, and the “conflicting type,” where both formal and informal are contradictory to each other. This study adopts formal and informal as defined by Douglas North.

5.3 Institutional change North (1990, pp. 83-92) believed that institutional change happens incrementally and slowly when entrepreneurs (economic or political) with bargaining power realize that they will benefit from the alteration of the existing institutional framework. It can also happen due to taste changes, but the most important cause is “changes in relative prices.” (North, 1990, p. 87). Although, the perception of the entrepreneurs is heavily influenced by the information received and the way they process it. However, that information is imperfect and may lead to a path- dependent pattern of development, once development is locked on a certain track, it is most expected to follow that way (North, 1990, pp. 73-92).

North (1990) stresses the importance of historical background in shaping the present institutional setting. Since the past shapes present actions, we can claim that there are historical

17 constraints to institutional change. Thelen (1999, p. 386) notes that “when policy makers set out to redesign institutions, they are constrained in what they can conceive of these embedded, cultural constraints.”

It must also be noted that formal institutions change differently from informal institutions. Formal institutions can be arranged and changed by actors who possess power, whether informal institutions emerge from the social framework and do not have a coordinating mechanism (Lauth, 2000, p. 24).

In summary, we see that both forms of institutions formal and informal, create the appropriate political, economic, and social environment for either growth or stagnation. Historical background plays an important role in the determination of these institutions and economic performances. North (1990, p. 14) points on the fact that “historically the growth of economies has occurred within the institutional framework of well-developed coercive polities.” In addition to that, there is a dissimilar nature, evolution, and essence between formal and informal institutions. Despite the line separating formal from informal institutions being blurry, identifying and observing empirically the informal institutions can be challenging. Lauth (2000) distinguishes five types of informal institutions: (i) clientelism, (ii) corruption, (iii) putsch threat, (iv) civil disobedience, and (v) custom law.

5.4 Institutional framework of analysis This chapter develops an integrated analytical framework to address the research question. In an attempt to simplify the combination of formal and informal institutions in Albania a quadratic figure (Figure 1) is constructed inspired by Williamson (2009).

Figure 1 Simplified combination of formal and informal institutions.

This model will be used to examine the role formal and informal institutions in different regions in Albania where EU projects under IPA II are running. In this model, strong formal institution means the existence of well-developed political constraints and high capacities while weak formal institutions mean insufficient political constraints and capacities. Strong informal institutions indicate high influence of customs and norms, while weak informal institutions imply minor impact of informal constraints.

The first square on the top right (Q1) represents the category with strong formal and strong informal institutions. Regions belonging to this category imply that they are strong in both political and informal constraints. Square Q2 shows a setting where formal institutions are less developed than informal ones. This institutional framework indicated that the regions are dominated by social norms instead of state’s law. Square Q3 reflects the opposite situation of Q2. This setting indicates strong presence of formal rules and weak social norms. The last square Q4, illustrates regions with weak formal and informal institutions. Here both formal and informal constraints are found lacking.

5.5 Operationalizing the analytical framework The evolution of growth-related, market-oriented institutions across different regions participating in the IPA II program in Albania are examined in the next chapters. The objective is to historically identify each region's type of institutions and performances under the three different historical periods: Ottoman, Communism, and Democracy. These regimes were very different from each other and probably had different institutional arrangements. In order to do this, the country of Albania needs to be divided into regions. To do that, the study takes advantage of the NUTS2 classification (Nomenclature of territorial units for statistics) used by the EU to divide up economic territories in the EU and candidates to EU countries.

The NUTS classification (Table 1) includes three hierarchical levels along with two levels for local administrative units (LAU). Due to the population (3.2 million), Albania is divided into three NUTS II units (North, Centre and South) while the whole country is classified as NUTS I. Each county, twelve in number, belongs to the third level (NUTS III) of NUTS classification (Eurostat, 2021).

2 The Nomenclature of territorial units for statistics (NUTS) is a geographical nomenclature dividing the EU into regions at three different levels (NUTS 1, 2 and 3 respectively, moving from larger to smaller territorial units (Eurostat, 2020a)

Table 1 NUTS units’ classification

CLASSIFICATION OF UNITS LOCAL ADMINISTRATIVE UNITS (LAU) NUTS I Whole country (Albania) NUTS II North, Center, South regions NUTS III Counties (12) with 61 Municipalities (Eurostat, 2020a)

Besides, the NUTS delineation is used by the EU as a guide for the implementation of its policies and allocation of funds. The development funds are allocated based on the level of the GDP value of each NUTS II region. Regions with less than 75 percent GDP per capita out of 100 percent, which is considered the average GDP (PPP) of the EU 27 countries, are eligible for funds (including the IPA II) (Eurostat, 2020b).

Before the study provides the different historical institutional setting of the country and how that affects the present socioeconomic situation for good or bad, a detailed methodology is built at the next chapter to gather data that will reflect the institutional situation as regards to the absorption of IPA II funds during period 2013-2020. After the data are gathered and analyzed and the historical background of the three distinct periods is provided, a discussion will follow where a reflection on the data and the theory chosen for this study will be examined.

6. Methodology and Methods

Lincoln and Denzin (2000, p. 19) argue that a research approach is based on various beliefs and feelings about the world and how knowledge should be acquired and studied. A study design that utilizes interviews and participatory observation from a variety of recourses during data collection is preferred for a qualitative study (Creswell and Clark, 2017). A field study during the month of April was included in the initially research design. However, due to the Covid-19 restrictions and also ethical medical consideration protocols, the fieldwork was canceled. Instead, an alternative research strategy is chosen to adapt to the global pandemic circumstances.

This study adopts a qualitative case study approach, with the case being Albania. The type of case study with embedded units was chosen because it offers the ability to look in-depth at sub- units located within the larger case and identify variations between them (Yin, 2003). More

20 specifically, the interview method will be used for data collection involving nine semi- structured interviews with key people from the three NUT II regions. The interviews are designed to capture the experiences and perspectives of officials working with IPA II projects in relation to institutional capacities and endogenous obstacles in Albania. It needs to be mentioned here that some data will also be descriptive quantitative data related to growth indicators of the different regions.

The chapter begins by describing the research strategy, where the reasons for selecting a case study are explained, and the operationalization of the method is presented. After that, a description of how the interviews will be structured and what exact data it is aimed to generate is provided. It also elaborates how the data will be collected through interviews that could help answering the research question, and the method of selection of interviewees is discussed. Last, limitations and weaknesses of the study are addressed.

6.1 Methodological Approach With the purpose of offering the best possible answer to the research question: How the institutional capacities of Albania affect the effective absorption of the EU Pre-Accession Assistance II funds for the period 2014-2020, an embedded single case study design is chosen, since the analysis of multiple sub-units such as the municipalities within the regions offers the possibility to explore the problem in-depth (Yin, 2003).

The logic behind the selection of this research method is based on two points. First it qualifies as being exploratory, and second, it involves more than one sub-unit of analysis. According to Baxter and Jack (2008), case studies can be categorized as explanatory, exploratory, or descriptive. This case study qualifies as exploratory since the phenomenon this study is exploring has no clear outcome (Baxter and Jack, 2008). Besides, the exploratory case studies answer “how” and “what” questions (Yin, 2014). The second point is important because the involvement of more than one sub-unit enables to study the phenomenon in different levels by zooming in the case or collect data from different multilevel sources (Yin, 2003). The embedded nature of this study allows a better understanding of the effects institutional capacities have on the implementation of IPA II in Albania since the regional-level (NUTS II) is nested within the national-level (NUTS I).

Baxter and Jack (2008) claim that conceptualizing the methodological strategy can help the researcher to (a) identify the actors involved in the study, (b) explain the relationships presented based on logic, theory, and experiences; and (c) offers to the researcher the opportunity to

21 collect general constructs into key concepts (Miles and Huberman in Baxter and Jack, 2008, p. 553). Figure 2 illustrates the research method strategy. On top of the figure is the NUTS I, which is the case study of Albania. Below that, are the institutional capacities, which is the main focus of this study. The Strategy Paper of IPA II follows where it is looked at what does it say in terms of the institutional framework. In order to have a more in-depth analysis, the study zooms in the regional-level NUTS II where it will closely examine the three distinct regions of the country. In order to get a fair representation of the regions and avoid selection bias, three counties from NUT III local level were chosen randomly for interviews. From each county three Albanian public servants working on IPA II projects at a local level (municipality) were chosen for the interviews. Last, economic indicators from the Regional Accounts in Albania for the period 2014-2020 are examined (Institute of Statistics [INSTAT], 2020).

Figure 2 The methodological approach

6.2 Interviews Interviews are among the most used methods of collecting data (Griffee, 2005) and one of the most important sources for collecting data in qualitative research (Yin, 2014). This method is used when the researcher is interested in facts and intends to get insights into a phenomenon or understand experiences, behaviors, and attitudes (Rowley, 2012, p. 261). There are different forms of interviews from which the research can choose. The type of semi-structured interviews, which is the most common format in qualitative research (Doody and Noonan, 2013), was chosen for this study. In semi-structured interviews, the researcher follows an

“interview guide” with specific topics, but the procedure takes the form of a conversation where the interviewee can influence the discussion by bringing up new questions (Bryman, 2012, p. 471). The whole process is flexible with open-ended questions, and the opportunity to raise new spontaneous questions that were not considered in the planning but emerged from the conversation is possible (Doody and Noonan, 2013).

On the question of the appropriate sample size of conducted interviews, Guest et al. (2006, p. 60) argue that there “no practical guidelines for estimating sample sizes for purposively sampled interviews,” fact that makes the choice quite vague. The choice of the sample and the sample size in this study were guided by the scope of the study and practical constraints such as the ability to reach and convince the right interviewees to participate and the available time (Covid 19 – related constraints). As the goal is to get a fair representation from local level in each region in Albania, public servants working in local IPA II projects from different municipalities in each county representing the region were chosen (see table 2). The local level was chosen due to the important role its playing in Albania’s integration process. Luigi Soreca, the EU Ambassador to Albania said that “most of the EU acquis is implemented locally” (Ministry of Internal Affairs, 2019, p. 20). Albania as mentioned at section 5.5 has twelve (12) counties and sixty-one (61) municipalities. The choice of the counties was made through a Structured Query Language (SQL) code (Figure 3), where three counties were generated randomly from a list of each region in NUTS II and from there municipalities was chosen randomly from each county with the same method. Central Albania has only two counties, therefore, was no need for random selection.

Figure 3 Random selection of counties using SQL

The selection of the key participants for the interviews was based on three main elements. First, to be representative in terms of the research question and the theoretical framework. Second, they should be public servants working for local-level projects funded by IPA II. And third, they should be distributed along the three NUT II regions. This fair and unbiased selection was made by creating a dataset with lists of counties from each region and a sub-list with the municipalities from the selected regions. In Table 2 you can find the final list with the participants in terms of region, country, and municipality.

Table 2 Method of selection

Respondent Region County Municipality Interviewee 1 North Kukës Mun 1 Interviewee 2 Shkodër Mun 2 Interviewee 3 Lezhë Mun 3 Interviewee 4 Centre Elbasan Mun 4 Interviewee 5 Tirana3 Tirana C Interviewee 6 Tirana P Interviewee 7 South Korçë Mun 7 Interviewee 8 Berat Mun 8 Interviewee 9 Gjirokastër Mun 9 . Plenty of changes had to be made in the early planning and coordination of the whole project due to the inability to access the field. The whole project was managed digitally through, emails, calls, and zoom meetings. The Delegation of the European Union to Albania Office was contacted first by phone and then by e-mail to assist me in finding officers working on IPA II projects. The database of the interviews can be accessed upon request as it is too large to fit in the Appendices.

The interviewees are public servants working on IPA II projects in local municipalities within the chosen county. Upon prior agreement with the participants, the interviews are held on Zoom or Google Meet. The interviews have been recorded digitally. It was agreed that the digital recording of the interview could be stored for up to ten days to transcribe and, after that, the digital record should be deleted. Within this period, all the interviews were transcribed and sent to the interviewees for their approval to ensure transparency. Creswell (2013) warns that it is

3 As Tirana County has the largest population, two municipalities were chosen for interviews, a peripheral one and a central one. Thus Tirana C and Tirana P.

24 important to consider cultural norms and the needs of the participants in the research. Therefore, anonymity of the interviewee was ensured for protection of privacy. Instead of their names, pseudonyms and designations are used (Bryman, 2012, p. 136). A consent form clearly explaining the project and the procedure of the interviews was preliminarily sent to the interviewees. The consent form was written both in Albanian and English in order to avoid communication problems.

The interview questions, which can be found in Appendix A, are designed to address the research question and the theory. In order to be relevant in in terms of theory and research question, the questions were compared with the theory and made sure they are consistent with it; questions that were not addressing the research topic were discarded. Open-ended questions were used to avoid yes or no answers. The final open question invited the participant to fill in any gaps that this study might have missed. Lastly, two sets of interview questions were prepared, one in English and one in Albanian, since it was assumed that some participants might feel more comfortable speaking at their mother tongue, Albanian. The transcripts of the interviews held in Albanian are translated into English. As I am fluent in Albania, language was not a barrier.

To analyze the transcript of the interviews is developed a coding system which can be found in Appendix B. According to Bryman (2012, p. 575), coding is the first step before conducting data analysis. Coding is a tool that helps to compress the transcripts of the interviews to make the data more manageable. Categories and themes are created by breaking down the data to pieces and then labeling them. These series of coded text make it easy to identify patterns and interpret the data (Bryman, 2012, p. 13). The coding system of this study is created according to the data collected from the interviews and the theoretical framework. First, the answers to every question were gathered and placed according to region. Then the transcripts were read, and some initial notes were made. Next, after scanning the transcripts several times, the most important codes were selected and grouped into categories. The categories were labeled under themes where connection, patterns and differences will be analyzed. Last, the key indicators identified by the interviews will be used according to a constructed point system to determine the institutional setting of each country. This coding system will be used in the empirical analysis to summarize the results and write the discussion according to the indicators generated by both the theoretical framework and interviews.

In addition to the interviews, the Strategy Paper of IPA II published by the European Commission (2014) is analyzed. The paper outlines the focus of EU financial assistance for the period 2014-2020. This indicative Strategy Paper outlines all the key areas where the aid would be invested in order to meet the accession criteria to join the EU. The document was scanned to see how the plan addresses the institutional framework of Albania.

Last, descriptive quantitative data are drawn from the Gross Domestic Product by Statistical Regions NUTS in Albania (2014-2020) published by the Albanian Institute of Statistics (INSTAT). According to INSTAT (2020), these regional accounts reflect the country's socioeconomic developments and play an important role in developing, implementing, and evaluating regional policies. The examination of key indicators of economic growth in the regional accounts will provide an additional perspective to the findings that contribute to the study's validation (Yin, 1994).

6.3 Limitation One limitation of the study is that interviews represent only the view of the people working on the projects and not those being affected by the projects, the Albanian citizens/communities. This is a limitation due to Covid-19 and the restrictions on travel. Except for the limitation of accessibility, the lack of time and resources made it impossible to find citizens living in municipalities that run IPA II projects wanting to participate in the interviews. The opinion of these people would have given a new dimension to this study since they know in more depth customs and norms of their region. Nevertheless, this study generates an agenda for further research, which will include data from the local population for a deeper understanding of the institutional setting and how it affects IPA II.

Another weakness of this study that needs to be mentioned is the timing carrying the interviews. On April 25th, 2021, were the parliamentary elections where according to the Office for Democratic Institutions and Human Rights (ODIHR, 2021) the pre-election period in the country is highly polarized with government institutions limiting access to information. According to reports of the Council of Europe and The Congress the country suffers from lack of transparency in the recruitment procedure in the public sector leading to nepotism, cronyism, and bribery. During elections are noticed abuse of public function for electoral activities from public servants in favor of the party in power. In addition, it is noticed a change in the staff of public administration according to the wining political party (Council of Europe, 2018). Considering this phenomenon this study is aware that there might be some bias from the

26 interviewed civil servants due to the pre-election climate in the country. Therefore multiple sources spread all over the country are used in order to eliminate potential biases.

Considering that this is a master thesis that is limited by time and recourses, the selection of nine interviews might not be enough to generalize but is enough to reveal problems, interrelations, and new information on the topic. Since there is a lack of research on this topic in Albania and generally lack of qualitative research on EU financial assistant towards candidate countries, this study hopes to ignite a discussion and expose new focus points on the institutional influence (mostly informal) over development. Besides, new knowledge on Albania's institutional capacities will be revealed in terms of economic and social development and who and what kind of endogenous forces are slowing the process.

Before we jump to the results it is important to present an institutional background of the country build on the theoretical framework. This journey in the past will assist not only the study but also the reader to understand better the institutional setting of the country and how that has evolved through the years and the inheritance it has left behind. After the background, the empirical analysis will follow.

7. Three different historical periods

In this chapter, the study looks at three different historical periods of Albania. The regions are placed on the institutional matrix developed in the theoretical framework in order to show the institutional shift through history and how that inheritance formed the current institutions of the country.

Albania’s administrative division through the different historical periods will correspond to the NUTS II and III level of classification. The first historical period was from the 15th century when the Ottoman Empire conquered the region of Albania until 1944 after which the Communist regime was established. It needs mention that the period between 1912 and 1944 are skipped from this period division due to the frequent change of regime in the country. In 1912 Albania got its independence from the Ottoman Empire and between 1925 and 1944 it was a Kingdom (Zickel and Iwaskiw, 1992).

The second historical period was from 1944 to 1991, when the country came under the rule of the Communist Party (La Cava and Nanetti, 2000). And the third historical period (1991 until present) represents a democratic era (Lerch, 2013).

The study will look at the systematic arrangement and institutional dominance during each period. This historical trajectory will assist our attempt to understand how the institutional arrangements of the past shape the current ones and create endogenous barriers to the successful implementation of the IPA II and development. In addition, it will show the role of the Kanun in each period, and the effects it might have still today will be examined at the empirical analysis in chapter 8.

7.1 First historical period: Ottoman Empire Before I explain the structure during the Ottoman period, it is important to understand how the clan system worked, mostly in northern Albania. This system was responsible for regulating everyday life and maintain social order.

At the center of the clan system or fis in Albanian was the household. The household functioned as the primary residence and the main economic center of the whole system. The leader of the household and other homes occupied by family members, which could be extended to seventy people, was the zoti i shtepis, which in free translation means the 'god of the house'. The title of the leader was held by the oldest and wisest member of the household. The household also included extended family such as brothers, uncles, and cousins. As the family would eventually grow and more households would be created forming a village, the leader would still have authority over the other households and ultimately would gain the title of the kryeplak or chief elder. However, the leader did not have absolute authority in the village (Doll, 2003). According to the Kanun, his actions were controlled by the village elders, who had as responsibility the control of justice in the fis system. It is stated in the Kanun that without the village elders, "no new law may be instituted, nor may any trial or judgment take place" (Gjecov, 1989, as cited in Doll, 2003, p. 151). According to Doll (2003, p. 152), the Kanun represents (informal) constraints that puts the Albanian chief elders and the clan community against new forms of rules and institutions imposed by different regimes through time.

The arrival of the Ottoman Empire into the Albanian region which attempted to establish a new political and social system signaled the first clash between this traditional clan system and foreign intervention. The Administrative divisions of the Ottoman Empire consisted of various hierarchical administrative units. In 1864, the Vilayets were introduced and the region of what is known today as Albania was part of the Janina Vilayet, Monastir Vilayet and Ishkodre Vilayet (see Appendix C) (Heidborn, 1908). This administrative division matches the NUTS II division, where South corresponds to the Janina Vilayet, Centre to Monastir Vilayet and North to Ishkodre Vilayet (see Appendix C).

During the 16th century, Albania was divided along religious lines: the North was Catholic, and the South and Centre were Orthodox Christians. This division in the regions is important since the Ottoman Empire had different results in establishing control over them. The technique used by the Ottomans to incorporate the territory into their empire was by enforcing their style of administration and feudal system. Their attempt to establish an Ottoman administrative system was successful with a little resistance from the South and Centre, but it completely failed in the North. In the Ishkodre Vilayet, which is the North part of Albania, the Ottoman feudal system and institutions were in direct conflict with the fis system as described by the Kanun of Leke Dukagjini (Doll, 2003, p. 153). According to H. Charles Woods (1918, p. 267), the tribes of northern Albania were eventually allowed to manage their internal affairs according to their customs and norms without the interference of the imperial government in Constantinople (capital of the Ottoman Empire).

These regional differences between northern and southern Albania that are indicated by the diverse assimilation of each region show how significant the influence of informal institutions was during that period (see figure 4). The Vilayet of Janina (South) and the Vilayet of Monastir had the largest conversion numbers to Islam, while the Vilayet of Ishkodre remained Catholic (Doll, 2003). The Catholic church managed to remain in the North due to the acceptance of the institution of Kanun, which claims that "the Kanun cannot place any imposition on the church but has the duty to defend it when it requires help" (Gjecov, 1989, as cited in Doll, 2003, p. 155).

Qevket Pamuk (2004, p. 230) argues that the Ottoman Empire's administrative control over its regions was related to the proximity that the region had to Istanbul (called Constantinople in that period). The area most close to Istanbul shared the same institutions with the capital; the rest reflected a power balance between the capital and local forces. Nadine Akhund (2009, p. 448) quotes the French consulate in Skopje of the Monastir Vilayet: "The officials are the slaves of the telegraph . . . The smallest or even meaningless decision can only be taken in Constantinople."

Figure 4 Institutional influence during the Ottoman period

In Figure 4, we can assume that the Northern region fits well in quadrat 2 with weak formal and strong informal institutions as the Ottoman Empire did not manage to establish its feudal system and institutions, and the region enjoyed the privilege of self-governance. In contrast, the Southern and Central regions suit better in the fourth quadrant where formal and informal institutions are weak since despite getting these regions under control, the governance was centralized in Istanbul, and no decision could be made locally.

7.2 Second historical period: The Communist Regime In 1944, the Albanian Party of Labor (APL) took control over the country and proclaimed the state a People’s Republic, and in 1946 a new communist constitution fundamentally overtook the country's old institutional system (Gjevori, 2018). When the new regime took over, they found an old system with a mix of the imperial Ottoman rule and customary local codes (Gjevori, 2018). As a new regime with a hundred and eighty degrees shift in ideology and system the APL need to establish its new model of ruling. The new policies introduced by the Communist government totally alienated the North since the new communist institutions were in direct conflict with the fis system (Doll, 2003, p. 158) and property rights, as discussed in chapter 4.2. From 1944 until 1991, the communist party prohibited any practice of the Kanun and anyone practicing it was heavily punished and their family isolated. The state made it clear that it wanted absolute obedience to its institutions (Arsovska and Verduyn, 2008, p. 233)

By 1966 the communist government took control over all formal institutions of the country. For example, the judicial institution was totally dismantled by abolishing the Ministry of Justice and lawyers under the excuse that they are bourgeois institutions. Instead, the APL under the excuse of a more fair and equal justice system established district people's courts and

30 military courts operated by party members. Doll (2003) claims that the majority of the high- rank officials (members of the APL) were from southern Albania. As a result, these institutional reforms killed the judicial independence both formally and informally, and they created a governmental apparatus that functioned as a tool for political repression (Gjevori, 2018, p. 21- 2).

Xheneti and Bartlett (2012), along the lines of Dimitrova-Grazjl and Simon (2010), describe the communist period as a model of patrimonial socialism with "limited bureaucratic professionalism, high levels of nepotism and corruption, few opportunities for political contestation, little economic freedom, a high degree of restrictiveness and isolation, and no access to the West" (p. 611). However, despite the harsh measures taken by the state to eradicate the Kanun, the creation of authoritarian institution and the attempt to seize power into the hands of the party leader Enver Hoxha, the unwritten (informal) institution of the Kanun survived in the Northern part of Albania (De Waal, 2004).

Doll (2003) argues that both the Ottoman Empire and the Communist regime were more successful in the south and central Albania. This fact significantly indicates the difference between the regions in terms of informal institutions and, more specifically, the fis system. According to him, all different institutions and regimes that have passed through northern Albania have failed to create a sense of trust. Thus, they have been unsuccessful in establishing a new institutional setting in the region (Doll, 2003, p. 161).

Albania's administrative division during communism was pretty similar to the one today, with the only difference that instead of twelve counties that exist today, there were ten (Berxholi, 2014). Therefore the NUTS division matches fine in this case. In Figure 5, we can place the north during the communist period as a region with strong formal and strong informal institutions (Q1) since both state and local tradition had a strong influence on the people. The state imposed its governance by seizing the control over all institutions and organization whereas the Kanun was preserved in secrecy and pass from generation to generation. Central Albania is the region with the capital city, and it would be fair to claim that it had strong formal and weak informal institutions and as the governance was extremely centralized. The south had the most APL members, and since it did not provide any resistance to the regime, the study assumes it had strong formal and weak informal institutions. There is not much information from that period since the communist regime would publish inaccurate and inconsistent data

31 or release data only when the performance was positive (Zickel & Iwaskiw, 1992), but from the end result, we know that the economy totally collapsed at the end in 1991.

Figure 5 Institutional influence during the Communist period

In conclusion, the Communist regime in Albania created only extractive and highly controlling institution by operating a secret police force that would suppress any opposition to APL, by monopolizing the media, and centrally manage the economy. It banned religion, beliefs and customs and attempted to destroy any kind of commitment that was not to the Communist Party. The sole purpose of these institutions was to enforce the Communist Party’s guidelines, spread propaganda while monitoring socioeconomic activities. The result of applying these kinds of institutions was severe economic collapse and civil revolution, which brought the fall of the Communist regime in 1991 (Saltmarshe, 2001, p. 114).

7.3 Third historical period: Democracy It would be rational to assume that after the fall of communism, Albania lacked any form of institutions to regulate everyday life and know-how skills to govern the country since the education system during communism was tailored around only communist ideologies (Zickel & Iwaskiw, 1992). The country lacked basic judicial infrastructures such as the ministry of justice and educated people in law (Gjevori 2018, p. 23). Consequently, the lack of judiciary institutions and the incompetence of the state authority to enforce the laws lead to the rising popularity of the Kanun, this time not only in the north but also in the s`outh and central Albania (The Independent Advisory Group on Country Information [IAGCI], 2020, pp. 12- 3). The Home Office's report on country information continues by stating that most of the blood feuds during the 1990s were due to property and land disputes regulated according to the Kanun (IAGCI, 2020, p. 16).

Nevertheless, as a democracy, Albania was eligible for foreign aid and development assistance from the international community. These aid programs helped the government make neoliberal-oriented reforms focusing on privatization, liberal economy, and stability (Xheneti and Bartlett, 2012). Although, from 1991 to 1998, the only elected body in the country was the parliament. That meant that all other forms of formal institutions were politicized, and there was no separation of powers. Therefore, in 1998, with the help of the international committee, Albania drafted a new constitution where self-governing bodies in the judiciary were established (Gjevori, 2018, p. 24).

However, in 2015 the Parliament of Albania commissioned an investigation of the judiciary which revealed that this institution still suffered from a lack of professionals, politicization, and corruption. The report came as a blow to the credibility of the rule of law in Albania. It resulted in strong internal pressure by the citizens and externally by the EU and the United States to rewrite the constitution. One-third of the constitution was rewritten in order to make it independent of politics and increase professionalism (Gjevori, 2018, p. 25). The IPA II assisted this sector reform with the allocation of € 42 million (Ministry for Europe and Foreign Affairs, 2020, p. 9). According to the Annual Report on the Implementation of IPA II Assistance, this reform has brought significant changes in the country's instructional setting by establishing new virtuous institutions (Ministry for Europe and Foreign Affairs, 2020, p. 81).

This short overview of the Democratic period in Albania shows a state which is characterized by inefficiency, politicization, uncertainty, and foreign interference in the form of aid and structural programs. However, it needs mention that the country is less polarized compared to the first two periods. In order to see how the institutional setting of the country looks, what capacities does it have and what are the obstacles to absorb foreign aid effectively, this study will use the empirical evidence from the interviews in order to place the regions according to their characteristics in the institutional matrix that were built in chapter in 5.4.

8. Empirical Analysis

In this chapter, the gathered data from the interviews and the chosen materials will be provided and analyzed. First, the IPA funds scope and role are looked at, and then the Strategy Paper of IPA II is examined as per priorities, objectives, and institutional consideration. Afterwards, the interviews are analyzed where key indicators are identified. Last, the Regional Accounts of the country are reviewed to check the macro-economic developments of the three regions. A

33 concluding discussion follows after this chapter, where the data are interpreted and commented regarding the theory.

8.1 The Instrument for Pre-accession Assistance funds According to the European Commission (2014), The Instrument for Pre-accession Assistance (IPA) of the European Union is a program which offers financial and technical support to Western Balkans countries since 2007. The IPA funds support reforms and build up the capacities of the countries during the accession process. More specifically IPA funds aim at assisting the country to undertake the necessary political, economic, and administrative reforms in order to align with the European Union acquis4, and eventually join the union. As the EU membership comes not only with rights but also with obligations, IPA funds invest in administrative capacities building in order to empower the Albanian institutions to self-manage the allocated funds and eventually the whole integration process. In addition, the development of administrative capacities will assist the country for the future efficient management of the Structural and Cohesion Funds.

8.1.1 Instrument for Pre-accession Assistance II Strategy Paper In the IPA II Strategy Paper (2014) were set the priorities and objectives of the financial aid for the period of 2014-2020. The European Commission drafted the paper in collaboration with the Albanian government and the consultation of relevant institutions such as the local government, the judicial branch, civil society and other global organization and institutions. The main goal of IPA II is to support Albania in the process of joining the EU. The financial assistance is allocated in key areas (see Table 3), which are believed to be the most effective to help with the accession criteria (European Commission, 2014)

The IPA II financial assistance works by providing the needed support to Albania in implementing the necessary reforms to join the Union. The financial assistant support has four specific objectives, (1) political reforms, (2) socioeconomic and territorial development, (3) alignment, implementation, and adoption of the EU acquis and (4) the reinforcement of regional and territorial integration and cooperation. The five policy areas where IPA II funds are focusing are in a) institution-and capacity-building, b) “socioeconomic and regional development, c) employment, social policies, education, promotion of gender equality, and

4 According to EU glossary (2021), EU acquis is the aggregated legislation, legal acts, and court decisions that form the EU law. https://eur-lex.europa.eu/summary/glossary/acquis.html

34 human resources development, d) agriculture and rural development, and e) regional and territorial cooperation” (European Commission, 2014, p. 3).

Unlike other financial assistance from the EU, IPA II is subjected to a decentralized implementation system, meaning that the management of the IPA II funds is transferred from the EU institutions to the Albanian authorities (European Commission, 2014, p. 8). Therefore Albanian authorities would have the responsibility of tendering, contracting, implementing and administratively manage the projects. The indirect management of the EU funds aimed at committing the Albanian authorities and institutions into making the needed reforms and prepare them for the management of future funds after joining the EU. Furthermore, this model of management was believed that it would strengthen the administrative capacities of the country and train both central and local institution to manage and execute such programs (EU Policy Hub, 2016).

The type of financing through IPA II takes various forms. It can be twinning, which is a long- term institutional-building mechanism that supports beneficiary counties to improve their administrative capacities through institutional cooperation and skill training to align with the EU legislation. Technical assistance is also offered in the form of help to apply, implement, manage, monitor, and control IPA II projects. Other types of financing are equipment supply, call for proposals, direct grants, and sector budgeting support, among others (European Commission, 2014).

Table 3 Indicative Allocation, million in Euro per policy areas and sectors

Total Albania 2014 2015 2016 2017 2018 2019 2020 2014-2020 DEMOCRACY AND RULE OF LAW 68.7 61.9 32.7 19.6 69.4 29 61.2 342.5 Democracy and governance 64.7 48.9 10.2 19.6 10.4 16.4 38.5 208.7 Rule of law and fundamental rights 4 13 22.5 0 59 12.6 22.7 133.8 COMPETITIVENESS AND GROWTH 0 30 49.7 60.6 46.2 70 40.5 297 Environment, climate change and energy 0 0 4 0 26.2 0 0 30.2 Transport 0 0 24 0 0 0 0 24 Competitiveness, innovation, agriculture, and rural development 0 0 21.7 60.6 20 40 40.5 182.8 Education, employment, and social policies 0 30 0 0 0 30 0 60 TOTAL 68.7 91.9 82.4 80.2 115.6 99 101.7 639.5

(European Commission, 2014). 8.1.2 Consideration of institutional framework Since the Strategy Paper was written in consultation with Albania’s relevant institutions from the state and local government the institutional framework of the country is considered. The paper focuses on formal institutions by evaluating their capacities and planning how to develop

35 them (European Commission, 2014). Despite, not having a separate chapter on informal institutions, some of those are scattered mentioned in the paper.

Democracy and governance

The EU Council and Commission have identified governance and the rule of law as the key challenges to Albania’s path to accession. They stress out that there is a need to reinforce democratic institutions and improve Albania’s public administration at central and local level (European Commission, 2014, p. 10). Even though the paper was addressing formal institutions, it continues by mentioning informal ones such as the need for additional efforts to “depoliticize the public service, ensure continuity, promote ethical standards in the administration, strengthen meritocracy in appointments, promotions and dismissals” (European Commission, 2014, p. 10). The latter issues are mentioned several times by some of the interviewees. The next chapter will elaborate further on them.

The objectives set by IPA II assistance were to strengthen democratic institutions, support the reform in the public administration by offering technical assistance and capacity building, assist the public service on how to prepare and handle the national legislation in line with the EU regulations and build capacities on key actors to promote a democratic culture in the country (European Commission, 2014, pp. 14-5). As risks to these objectives, there were only two identified, one formal and one informal. The macroeconomic circumstances of the country could slow the reforms and the politicization of civil society including the media that could harm the promotion of democratic culture (European Commission, 2014, p. 16).

Rule of law and fundamental rights

The IPA II funds focus on the most pressing needs and capacities in the sector of justice and fundamental rights. Those are the operation of the justice system, the protection of human rights, the property rights reform, media freedom and the fight against corruption in the public institutions (European Commission, 2014)

The biggest issue highlighted in the paper regarding the justice system is the lack of a solid analysis of the problems in the sector to look for possible solutions. The challenges identified in the Strategy Paper are (1) lack of efficiency and performance measures in the judicial system, (2) incomplete legislative framework that does not promote accountability and independence and (3) lack of education and training system (European Commission, 2014, p. 17). In 2015, as mentioned in chapter 7.3, the analysis of the sector was commissioned, and all the challenges

36 were addressed by proceeding with a big reform in the judiciary (Ministry for Europe and Foreign Affairs, 2020). Another significant challenge identified is the high level of corruption in the public sector. The paper highlights that special attention is required to tackling corruption in sectors such as local administration, public procurement, police, taxation, customs, health, and education. The high level of corruption has, as a result, the “low level of public trust in the judiciary.” (European Commission, 2014, p. 17)

The problem of property rights is also highlighted since it is still not properly defined and significantly affects the land and credit market and generally the whole performance of the economy (European Commission, 2014, p. 17).

Again, there is no clear separation between formal and informal institutions in this sector, but there is a mix of them. Jointly with the formal institution of the judiciary, informal institutions such as corruption and the existence of an informal market of property rights are addressed.

The objectives set in this sector were the creation of an efficient and independent justice system that aligns with the EU legislation and standards. The risk to the fulfilment of the objective is the potential delay due to lack of financial and human resources to successfully perform the reforms. Therefore, special attention is paid to the capacity building of the Albanian authorities (European Commission, 2014, p. 17).

Territorial cooperation and regional cooperation

IPA II planned to finance several programs for cross-border territorial cooperation (CBC) for the period of 2014-2020. These programs address common challenges that lead to slow economic growth in the remote and rural border areas. The programs focus on economic competitiveness, social inclusion, sustainability, cultural heritage, and tourism. The program also includes cooperation with the EU Member States which will give the opportunity to Albanian applicants such as regional and local institutions to train with the procedure of territorial cooperation and extend their network (European Commission, 2014, p. 34).

After considering the lessons learned from IPA I in this sector, the Strategy Paper claims that the institutional framework governing IPA II cross-border programs will be less complicated, restricted to a single contracting authority per program, single financialization and less thematic priorities in order to guarantee greater impact (European Commission, 2014, p. 34).

There are several objectives set on this sector, (1) support local and regional governance with administrative capacity building: (2) encourage employment, mobility, and social inclusion;

(3) strengthen public infrastructures; (4) promote tourism and cultural heritage; (5) invest in skill learning for the youth; (6) strengthen competitiveness; (7) strengthen research and (8); protect the environment (European Commission, 2014: 35).

Other sectors that are addressed by the IPA II Strategy Paper but are less relevant in this paper are the agriculture and rural development, education, employment and social policies, transport, environment and climate action and home affairs (European Commission, 2014).

In conclusion, the Strategy Paper appears to consider mostly formal institutions with the largest funding going to democracy and the rule of law. Informal institutions are mentioned too, and they play an important role in the situation of the country. For example, the paper mentions that “competitiveness is hampered by deficiencies in the rule of law, including enforcement of contracts, unclear property titles, lack of specialized and skilled labor force, and a large informal economy” (European Commission, 2014, p. 5). In addition, it is recognized that there is a large informal labor market with the role of women being undervalued in both the labor market and public life (European Commission, 2014). All the above information is a sign that there is a coexistence of a formal and informal institutional framework in the country. To learn more about it and dive deeper, this study will look at the answers of the interviews from the public servants working on IPA II projects at the local level.

8.2 Interview Analysis In this chapter, the collected data from the interviews will be analyzed. The coding revealed some key indicators about the institutional setting of the regions and how that differs from area to area, and its effect on the absorption of the IPA II funds. To measure the effectiveness of the key indicators generated from the interviews, a scoring system is built. The value of the point system starts from minus one (-1) to plus one (+1). The lowest value (-1) represents strong informal institutions and absence of political constraints and capacities; zero (0) values show weak formal and informal institutions with average capacities; plus one (+1) indicates strong formal institutions with well-defined political constraints and good capacities. For example, when an interviewee comments positively on administrative capacities, then the score is plus one (+1); in case of a negative comment, then the score is minus (-1), zero when the statement is neither positive nor negative. In the end, the scores are summed up, and the result determines the place of each county on the Institutional Matrix table built in the theoretical framework.

8.2.1 Key Indicators

Capacities

Regardless of region, almost all of the municipalities claimed that they lack administrative capacities to apply, implement, and manage IPA II funded projects. One of the municipalities in the county of Lezhë (Interviewee 3) stressed that the regional level clearly does not have the administrative capacities to handle the IPA II funds. However, the level of capacities depends on a certain degree to the size of the municipality; the larger it is, the more capacities it has. For example, Interviewee 5, from Tirana (the capital) county, claims that they have good capacities to attract and absorb EU funds. On the other hand, the coordinator from one of the Southern municipalities stated that:

We have average capacities, but that is not because we are not trained, but because every time there is elections, and another political party wins, the administrative staff changes completely, and new training has to be done from the beginning (Interviewee 7).

This was mentioned by almost all the interviewees in every region (North, Centre and South). The issue of losing qualified human resources was viewed as a result of two factors. First, due to the aforementioned reason of politization within the local administration, and second, due to extremely low salaries, people are getting the training and then move for higher compensation in the private sector or abroad.

They all agree that local government plays an important role in the accession process. Therefore the capacity building is essential for their ability to absorb IPA funds and manage the projects. Interview 6, who has been working before at the national level (Ministry of Culture), claims that the central level is more organized and has better capacities than the local level where “programs financed by IPA funds are very difficult to complete or even write the reports since there is a lack of capacities.”

Interviewee 2 stated that municipalities lacked even basic capacities before the reform of 2016. Nevertheless, they all agree that there is still a need for major improvements. According to Interviewee 2, to meet EU goals, the local level does not only need further investments in capacity consolidation but also in coordinating actions and contributions in line with goals and the interests of regional and national partners for sustainable development.

There is consensus from all the interviewees when it comes to the positive contribution of IPA programs in institutional capacity building. The municipalities in the northern counties claim

39 that Albania has definitely still the need for further capacity building and expertise from developed countries. Interviewee 3 argues that improvement depends on the “will of the people who possess the decision-making power in local level”. He is implying that these local leaders sometimes do not want EU projects in their area. Probably due to the high external control in EU projects. There is a mystery or “puzzle”, as he says, around the applications for these projects. However, Interviewee 1 highlights the fact that the level of attracted EU funds depends on the capacities of the administrative staff. Despite the offered training for civil servants by relevant EU and internal institutions to increase administrative capacity at all levels, there is still much space for improvement (Interviewee 1).

The interviewees in the central regions claimed that Albania was not prepared to deal with IPA funds, but things have improved significantly since IPA I. The southern municipalities seemed more positive and optimistic than the northern region regarding the progress that is made. Interviewee 8 claims that it was understood that the absorption of the EU funds was very important for overcoming the gap in municipalities’ limited budgets. Therefore it is important for the municipalities to strengthen the staff dealing with the application and implementation of these projects. All three municipalities state that there has been done a significant improvement in capacity building and fund absorption by training a large number of civil servants.

Informal Institutions: Customs, norms and the Kanun

Two out of three interviewees in the northern region see Albanians as still rooted in customs and norms, depending on the region they say. Although they point out that only the old generation is deep-rooted in customs and norms, the young ones are adapting to contemporary social life. Interviewee 6 from the central region, in an attempt to reflect on herself, says,” to be honest, deep inside, I see myself as rooted in customs and norms despite our will to adapt to the western values.” She keeps elaborating on the issue on a national level by saying that despite Albania being a small country has a wide culture and mentality deep-rooted in endless social, regional, and political developments. Interviewee 6 explains that customs and norms have a deep effect on Albanian society because the country has been functioning for a long time under unwritten laws.

On the contrary, the municipality of Tirana (Tirana C) and all the municipalities in the southern region claimed that Albania is not deep-rooted in customs and norms. They argue that their area promotes traditional cultural values in a modern way. Interviewee 8 believes that customs

40 and norms apply only to some territories in the country. Interviewee 9 claimed that “Albanians can adapt quickly, and we have overcome issues of customs and norms.”

Kanun is a sensitive issue in Albanian due to its mainstream association of it with blood feuds, which are still observed in some areas today (Elsie, 2012). Despite the book of the Kanun having twelve chapters addressing all the issues of social life, the chapter on honor is the most popular today. It was noticed that some of the interviewees tried to avoid the question regarding Kanun or even expressed their sensitiveness to the matter. Despite this being a sensitive matter extremely interesting answers were given. For example, interviewee 3 from the northern region (county of Lezhë, municipality of Mirdita) said that: “The institution of the Kanun, even though informal it plays a big role in the social life of the community, especially here in our region of Northern Albania.”

As it was mentioned in chapter 4.2, Mirdita was one of the regions that resisted most the communist regime and had close ties to the informal laws of Kanun. When answered question nine (9) regarding property rights issues in Albania, the same interviewee said that property rights play a crucial role in society and that Albanians have a strong bond with their property and land. He continued saying that:

The element of the Kanun in the society makes it stronger. For example, after the fall of communism, my family was one of the families who benefited from the Kanun and got back the properties and land owned before 1945 [before communism]. If it was depended on the law, we might had benefited more, but the law was absent.

The case of land distribution in Albania after the fall of communism was discussed in chapter 4.2. Due to the absence of law, we see here that people had to regulate affairs by themselves using informal laws inherited from the past. The interviewees in the central region recognize that the phenomenon is evident in the northern regions of the country and have a broader opinion about the Kanun, its influence on society and how it should be handled. Interviewee 6 mentions the fact that Albanians have been living and continue to do for so long with the element of the Kanun in the society, and it is something that they cannot deny and look the other way since it is part of the culture and heritage. Interviewee 4 says that:

The informal institution of the Kanun is an institution that mostly regulates the property rights in areas where it applies and where (formal) institutions fail to integrate and assimilate to what is really intended to.

All the interviewees agree and suggest that instead of avoiding or denying the phenomenon, it needs to be addressed and go through a transforming process with the support of by EU and the government. The scene in the southern region was totally different from the northern and central ones. All the interviewees in the south said that Kanun does not play a role in their region, and therefore this question is irrelevant to them.

At the question (8) on how development programs initiated by the EU address the informal institutions in the country, most of the responses were positive towards the level of attention dedicated by IPA II. Although, two out of three interviewees in the north believe that this topic should be enforced further by future programs. According to the interviewees, the main informal institutions addressed and targeted by IPA II are the role of women in society, informal markets, and gender equality. Interviewee 5 does a self-critique and says that since it is Albania that aims at joining the Union, the citizens need to understand that society works under constraints, and they cannot continue behaving and do things that are not acceptable in the Union.

Obstacles

There are many endogenous obstacles to the effective utilization of the IPA II funds identified by the interviewees varying from bureaucracy and capacities to financial and clientelism. However, there were three common obstacles identified by all the interviewees regardless of region, these are:

1. The problem of the public procurement legislative framework. There is a confusion under which law should the coordination of the EU projects should be imposed. This confusion is between the Albanian Public Procurement Law (PPL) and the Practical guide on contract procedures for European Union external action (PRAG) under the European Union Procurement Directives. The Albanian Public Procurement Law does not align with the EU procurement directives. 2. The long bureaucratic procedure of opening a bank account to deposit the money for the project. 3. Some of the programs require co-financing and municipalities are struggling to secure the 20% co-financing needed to get the projects.

In addition to the common obstacles, there are also detected other barriers that vary depending on the region. For example, Interviewee 2 mentions the lack of trust from domestic and foreign investors towards the local government. Another institutional obstacle to the effective

42 absorption of the funds mentioned by Interviewee 3 is the lack of decision-making power of the local government due to hierarchical reasons. Despite the local government being self- governing, they are dependent on the central government. In addition, he mentions that there are also language barriers. It appears that there are people working on EU projects without having the needed English skills to effectively, apply, implement, or carry an EU funded project.

The issue of inexpert human resources is elaborated further and in more detail by the interviewees in the central region who are also closer to the central government. They claim that there is a lack of well-trained human resources in both local governments and in the relevant ministries. Interviewee 5 says that he thinks that there are people holding certain positions without having the necessary skills to perform the required tasks needed in EU projects. While Interviewee 6 says that there is a lack of clear job description for experts dealing only with IPA funds. Besides, she adds that senior management of relevant beneficiary institutions has limited knowledge and information on planning and implementing IPA projects. The same interviewee makes a very interesting comment regarding the sector where IPA programs have success and where they fail to deliver.

It is strange when all the other programs are rigorously implemented and completed in order to meet European standards, but when it comes to the sector of governance, democracy, and the rule of law, the programs encounter obstacles (Interviewee 6).

This observation is in line with the book of Gjevori (2018), Democratization and Institutional Reform in Albania, where he examines why Albania went under a successful armed forces reform and achieved accession in NATO in 2009, but it has failed to do the same with the judiciary reform and join the EU despite both cases having same conditions and the same pollical class.

The municipalities in the south, except for the institutional capacities obstacle, they mention the huge bureaucratic obstacle in the absorption of funds that are coming from the sector of Territorial and Regional Cooperation, specifically from the bilateral program with Greece. These funds are transferred with a delay of three months, creating a chain of delays with the payment of suppliers, partners, and subcontractors. To improve this for the future, they say that the up-front fund should be raised from 20% to 50% or to reform the system of allocating money to the beneficiary.

Property rights

As this study has argued, property rights are an important factor for Albania's economic and social development. We have also seen a special connection between Albanians and property that have gone through many shifts due to change in regimes and systems. Here we analyze the answers of the interviewees on how they see the issue of property rights affecting the utilization of IPA II funds and economic development in the country generally. All the participants of the interviews claimed that property rights are important for social and economic development and the effective utilization of IPA II funds and that the issue remains a huge problem in general which slows development in the country.

Regarding the north, it was already mentioned the special connection between property rights and Albanians sustained by the Kanun as inherited from historical informal institutions dominating the area. Interviewee 3 states that one of the first required documents from the donors (the EU in this case) who aim at providing financial assistance for the renovation or building of cultural buildings is the certificate of ownership. From his experience, there have been many problems regarding projects and property rights in the past. What is intriguing in this question is the answer of Interviewee 2, who have been insisting that informal institutions do not have any power over Albania and Albanians. Here she claims that there is a large number of unregistered real estate, which is due to the problematic property rights legislation. As a result, it has created a big informal market that makes impossible the determination of immovable property value in the formal market affecting negatively domestic and foreign investments. She continues by stating:

The issue of property rights is an important factor in the functioning of the market economy. The more problematic and vaguer the property rights legislature is, the more difficult it is to achieve sustainable economic development of the country (Interviewee 2).

When it comes to the effect of property rights have on the utilization of IPA II funds, the same interviewee says that the IPA II rural development (IPARD) program which finance agricultural and rural development projects in collaboration with the Albanian government has been heavily affected by the property rights problem since potential beneficiaries like farmers have to prove that they own the land in order to qualify for the grand. As a consequence, many of them that do not have ownership certificates for the lands that they have been using for years can not apply and qualify for the offered grants.

Interviewees 4 and 5 argue that property rights have restricted the municipalities to carry work only on public-owned property and land. The issue creates mistrust to domestic and foreign investors since the future looks uncertain and, as, an effective investment in this sector, are difficult. Interviewee 6 states that:

Property for the individual is something sacred, and the bond is so strong that it has led to many murders committed due to property dispute “prishjen e gjakut” [Kanun reference]. People consider property an extension of themselves, and no one should touch that” (Interviewee 6).

The effect of the communist regime on the issue of property rights was mentioned by Interviewee 5. He says that the trauma of not owning any assets or property communism left behind has created an eagerness towards claiming what is rightfully yours. Although, who is the rightful owner is not that clear anymore since for the same land or property, sometimes there are multiple certificates of ownership possessed by different people. Some legal documents dating back to the Ottoman period and others from the post-Communist era when the wide national range of privatization process took place. On top of that, in the first years of transition, the country went through major internal migration from mountainous and rural areas towards the periphery of the capital and cities located in the westside of the country close to the Ionian Sea. This demographic change resulted in the creation of “informal” urban areas with numerous unauthorized buildings and occupied land. Last, the reforms attempting to fix the problem, instead they created a highly complex system with many gaps and overlaps that resulted in more confusion and lack of a clear functional system of proper rights.

Almost all interviewees in the south shared the same opinion and concerns about property rights with the rest of the regions. They agree that is a huge problem that decelerates economic and social development and decreases the level of absorption of EU funds.

IPA II performance and effectiveness

The interview had questions focusing on the performance and success of the IPA II program and how much the civil servants working on these projects have benefited in capacity building. In order to presents the results a figure (Figure 6) is build where the aggregated results per region are set in a grade from one to ten. Some comments on the rating and the differences between the regions will follow.

Figure 6 Colored map of Albania showing on a grade from 1 to 10 the institutional capacity building and the overall success of IPA II according to the interviewees

On the question of what extent the IPA II projects have achieved institutional capacity building from a grade from 1 to 10, the answers were quite positive. However, they all mentioned that there is still a need for improvement. They all point out that there have been several training sessions to build administrative capacities, and the staff working on EU projects has grown substantially. Although, seeing the map, one can notice that despite the positiveness of the progress made compared to how institutional capacities were before IPA II, the northern regions argue that there are still many challenges to overcome.

When the interviewees were asked to grade the level overall success of IPA II, the Southern regions were more generous on the grading compared to the rest of the regions. Interviewee 3 did not want to give an exact number at the beginning, since he is not sure about the success of the programs.

There are a lot of questions regarding the IPA II funds, like where the largest amount of money is going. I do not know whose fault is, maybe the national or local government, I do not know, but the program struggles somewhere (Interviewee 3).

He continues arguing that the programs are good at building capacities or infrastructure, but when it comes to covering people's real needs, they fail. He explains by giving an example:

The final result of one of the projects we ran was just a book [he shows me the book and looks disappointed], having as a result just a book raises questions. These people deal with daily economic struggles and the help they get is just a book (Interviewee 3).

What troubles most Interviewee 3 is the fact that only a small portion of the funds reaches the local government. He wonders why that is the case since they know best the needs of their fellow citizens as they are closer to them. One of the reasons pinpointing to this problem except for the fair distribution of the funds is the fact that a lot of these funds are won by NGOs who have better capacities than the municipalities when it comes to applying for the grants.

All things considered, the interviewees had both similar and diverse beliefs on the issues discussed. To simplify the information gathered from the interviews, Table 4 was built out of the coding system. The results of the point system used to determine the value of the key indicators analyzed in this chapter are placed accordingly. The last column (Sum) shows the aggregated total score of the counties, which is used later to construct the institutional matrix, Figure 7. Tirana P and Tirana C are added at the end to give a final result representing the whole county. The generated matrix in Figure 7 represents the current institutional setting of Albanian regions during the third period of Democracy, more specifically, the period 2014- 2021. Some comments on the results and the detected patterns will follow, and from there, the study looks at the macroeconomic indicators of the regions in order to compare with the results of the interviews.

Table 4 Point system on key indicators placing the regions on the institutional matrix

Sum

spondent

Kanun

Region

County

Obstacles

capacities

Improved Improved

Capacities

institutional

Municipality

Property rights Property Customs and norms and Customs

Interviewee 1 Kukës Mun 1 -1 -1 -1 -1 -1 0 -5

Interviewee 2 Shkodër Mun 2 1 1 1 -1 -1 -1 0

Interviewee 3 North Lezhë Mun 3 -1 -1 -1 -1 -1 0 -5

Interviewee 4 Elbasan Mun 4 0 -1 0 -1 -1 -1 -4

Interviewee 5 Tirana C 1 1 1 -1 -1 1 2

Interviewee 6 Centre Tirana Tirana P 0 -1 1 -1 -1 1 -1 1

Interviewee 7 Korçë Mun 7 0 1 1 -1 -1 1 1

Interviewee 8 Berat Mun 8 0 1 1 -1 -1 1 1

Interviewee 9 South Gjirokastër Mun 9 0 1 1 -1 -1 0 0

Figure 7 Institutional setting during IPA II, 2014-2020.

We notice that most of the northern counties are in the second quadrant with strong informal and weak formal institutions. Whether the rest of the counties, except Elbasan, are spread among the third and the fourth quadrat where the informal institutions are weak. More specifically, two out of three northern counties have strong informal institutions and weak formal ones; two out of three southern counties have strong formal institutions with weak informal; one southern and one northern county seems to have both institutions week. The central counties are divided among the second and third quadrant. The interviewed peripheral municipality in Tirana scored minus 1 (-1) at the point system, which places it in the second quadrant, but the value of the central municipality (municipality of Tirana) brought the average to plus one (+1), which places it as a region with weak informal and strong formal institutions.

The distribution of the regions in this period seems pretty similar to the other two periods, the Ottoman period, and the Communist period. The northern region has been fixed in the quadrats with strong informal institutions, whether the southern region has been constantly in the quadrats with weak informal institutions, with the central region being more flexible.

8.3 Regional Accounts Looking at the Regional Accounts in Albania from the Institute of Statistics (INSTAT, 2021) for the period 2014-20185 to see the macro-economic developments of the country, we notice in Figure 8 that GDP per capita is much lower in the northern region than in the rest of the country. Figure 8 visualized the GDP per capita both at NUTS III level with the large map and

5 The data from years 2019 and 2020 are missing from the database.

NUTS II level with the small map on the top right. It is visible that counties in the center and south have a much higher GDP per capita than the counties in the north. According to the Albanian Institute of Statistics, for the period 2014-2020, GDP at current prices was 11.027,916 Million, and the average real GDP growth rate was 2.9% (INSTAT, 2021).

Figure 8 Graphic illustration of Gross Domestic Product per Capita, in Euro by County & Region, 2014-2018.

(INSTAT, 2021)

Statistical Region Level 2 – NUTS II

Zooming in the NUTS II level, we notice at Figure 9 that the highest contribution to the GDP at current prices for the period 2014-2018 is the Central Region with an average of € 5.277 million, and it accounts for around 47% of the total GDP. The GDP in this region has been increasing steadily, with the highest level hitting 2018, where the GDP in real terms increased 5% compared to 2017.

Second, at the highest level of GDP at current prices, is the Southern Region with an average of € 3.204 million, which constitutes 29% of the country's total GDP for the period 2014-2018. During this period, the region has had a small increase, with the highest one being the jump from 2017 to 2018 with a rise of 3.6%.

The region with the lowest contribution to GDP in current prices was the Northern Region with an average of € 2.584 million. The Northern region constitutes 24% of the total GDP of the country. Compared to previous years, the GDP in real terms has increased but not significantly.

By looking at the numbers bit also the visual representation of the evolution of the GDP in the NUTS II level, it is clearly visible the division between the north and the rest of the regions.

Next, the study dives deeper into the NUTS III level to see specifically each county's performance analyzed in this study.

Figure 9 Gross Domestic Product in million Euro by Region, 2014-2018

7,000.0 6,325.4 6,000.0 5,640.0 5,277.7 5,050.7 4,837.2 5,000.0 4,535.1

4,000.0 3,539.4 3,143.1 3,119.9 3,212.0 3,204.5 3,008.3 2,956.8 3,000.0 2,549.2 2,707.0 2,584.4 2,290.5 2,418.8 2,000.0

GrossDomestic in Product Euro million 1,000.0

- 2014 2015 2016 2017 2018 Average Period

North Center South

(INSTAT, 2021)

Statistical Region Level 3 – NUTS III

The average GDP per capita in Albania for the period 2014-2018 was € 3,847 (INSTAT, 2021). In Figure 10, it can be noticed that only three counties are above the country’s average GDP per capita. The county of Tirana had the highest level of GDP per capita for that period, with around € 5.557 and average growth of 4.58% (Figure 11). GDP per capita for the county of Tirana was around 44% above the national average, followed by counties that almost all belong to the southern region (except Durres, which belongs to the northern region in the Statistical Classification, but it is closer to the central region geographically and culturally). All southern counties participating in this study have a higher average GDP per capita than those in the north. The county of Berat registered an average growth of 2.03%, and the county of Korce had a 0.95% growth, while the county of Gjirokaster, despite being the second with the high GDP per capita, had a decrease of -1.17% on the average growth for the period 2014-2018.

The county with the lowest average level of GDP per capita for this period was Kukes, with around € 2.451 and negative average growth of -1.84%. GDP per capita for the county of Kukes was around 36% below the national average. The next county with the lowest average GDP

50 per capita was Elbasan, with around € 2.714 and average growth of 1.39% for the period. GDP per capita for the county of Elbasan was around 29% below the national average. The counties of Elbasan and Kukes have also scored very low in the point system developed in this study (see Table 4), which makes it consistent with the economic data drawn from the Albanian Institute of Statistics.

Figure 10 Average Gross Domestic Product per Capita, in Euro by County, 2014-2018

Tirana 5557.2 Fier 4207.7 Gjirokastër 3882.2 Durrës 3827.4 Vlorë 3365.0 Berat 3132.9

Korçë 2881.0 Counties Lezhë 2817.7 Dibër 2800.6 Shkodër 2790.4 Elbasan 2714.6 Kukës 2451.9

0.0 1000.0 2000.0 3000.0 4000.0 5000.0 6000.0 GDP per capita in Euro

(INSTAT, 2021). Albanian Average = 3,847 € Figure 11 Average Growth Rate percentage of GDP by county, 2013-218

5.00 4.58 4.00

3.00 2.03 2.00 1.78 1.39 1.00 0.95 -0.11 0.00 Kukës Lezhë Shkodër Elbasan Tirana Berat Gjirokastër Korçë -1.00 -1.17 -2.00 -1.84

-3.00

(INSTAT, 2021).

It is noticed a common pattern between the results of the interviews and the descriptive statistics drawn from the institute of statics in Albania. It appears that the north is less developed and struggles more to achieve economic growth compared to the other two regions. In the next chapter of the discussion, the study will elaborate further on this pattern and discuss how it appears that institutions matter when it comes to development, and specifically, informal institutions have a strong influence on its course.

9. Discussion

The study demonstrates a pattern in which regions with good quality formal institutions have better economic performance than areas with poor formal institutions. As the data analysis showed, areas with stronger formal institutions tend to have higher economic growth than areas with stronger informal institutions. This analysis supports the theory that well-defined quality institutions matter for economic growth (North 1990). As the study of Granville and Leonard (2009) in chapter 4.1 revealed an uneven regional economic growth in post-Communist Russia due to the impact of informal institutions, it appears to be the same case in Albania. Regions like Northern Albania, where historically customs and norms have had a strong influence, and state laws had been absent, seem to be bound to slower economic growth compared to the other regions. Like Interviewee 3 said when describing the story of how his family got the land after communism,” If it was depended on the law, we might have benefited more, but the law was absent.” As we saw in Chapter 7, the law has been “absent” in this region since the Ottoman period (except for the Communist era), where not even the imperial Ottoman government managed to impose their feudal system and institutions over North’s Kanun system of affairs (Woods, 1918, p. 267). Fact that seems to indicate the robustness of informal institutions in the region. Therefore how can someone expect a smooth and quick adjustment to new growth igniting institutions?

Scully (1988) mentioned that after World War II, nations had the opportunity to choose between institutions that promote free markets, democracy, and the rule of law or what Acemoglu and Robinson (2013) call extractive economic institutions. As history has shown, Albania chose tragically wrong by siding with the Eastern Block and embracing communism. A communist regime that isolated the country and wrecked every formal and informal institution. As a result, it left behind a country that lacked the basics to start with the development process. North (1990) emphasizes on the significance of history in shaping current institutional settings and, considering that Albania lacked both pre-war and after-war

52 democratic institutions (Hall, 2001), explains a lot about the low economic and social performance it is experiencing.

According to the theory in chapter 5.3, institutional change happens when actors benefit from it, but cumulative norms and culture that have persisted through history do not change quickly as it is extremely challenging for social actors to manipulate beliefs. The majority of the interviewees in the Northern and Central region claimed that customs and norms have still an influence over society and that the informal institution of Kanun is still prevalent in some areas. According to North (1990), it is the persistence of the (informal) institutions of the past that explains why present changes hinder growth and development instead of promoting it. In addition, Thelen (1999, p. 386) mentions the fact that when policymakers intend to redesign institutions, they should consider the rooted cultural constraints of the society. The question raised here is, did the EU through the IPA programs considered such informal constraints?

According to IPA’s II Strategy paper and the Interviewees, the EU has given consideration to informal institutions in the country. Although, the informal institutions considered by the EU seem to have the characteristic of being generic and not specifically customized for Albania or the different regions in the country. For example, some of the informal constraints examined by the EU are informal economy, gender equality and trust. These are common phenomena encountered in every society but addressing the Kanun and deep inherited beliefs from the Communist and Ottoman-era would be more specific and effective. In this sense, the EU instead of adopting generic strategies on addressing institutions, it needs to create a specifically customized strategy based on the region in order to be more precise and consequently successful. Therefore, this study seems to indicate that overall theory of institutions and historical specific context matter.

On the issue of property rights, all the interviewees agreed that it is an extremely important factor for both the socio-economic development of the country and the more effective absorption of IPA funds. However, it appears that when it comes to the rule of law and governance, the country struggles at producing effective legislation, which corresponds to the level of complexity of the contractual relations and transactions of the society. Interviewee 5 mentioned that the reforms done to regulate property rights legislation ended up being highly complicated and ineffective instead of harmonizing the issue. Besides, Interviewee 6 highlighted the fact that the only sectors where reforms tend to fail are in governance, democracy, and the rule of law. Recalling the three-level scheme portraying the relationship

53 between Governance institutional environment and individuals discussed in the theory chapter 5.1, Williamson (1993) discusses the notion of adaptive governance to the level of the complicity determined by the actors involved in transactions (organizations, individuals, NGOs etc.). Nevertheless, according to the interviewees IPA II program has contributed substantially to the improvement of institutional capacities and needed reforms in order to meet the EU standards, but there is still much to be done. As discussed in the literature review, institutions do not always function the way they were intended to do when designed. This variance between “de facto” and “de jure” is also noticed by some of the interviewees when they argue that the end result of the projects sometimes does not reflect on the real problems the people are facing.

Looking at the obstacles to the utilization of the IPA II programs for the period of 2014-2020, it can be noticed that the main one is the misalignment between the Albanian Public Procurement Law (PPL) and the European Union Procurement Directives. This difference does not only create confusion for civil servants involved in the projects but also limits the scope of the IPA II projects. Another important obstacle is the lack of administrative capacities and skilled staff to handle the programs. Many interviewees from all three regions claimed that there is a big issue with the change of well-trained personnel for political reasons. The same issue is highlighted in the reports of Office for Democratic Institutions and Human Rights (ODIHR), where they discuss the high politicization of civil servants (ODIHR, 2021). As a result, public bodies such as municipalities lack the capacities to apply and absorb grants offered through IPA II funds. In addition, due to inexperienced human resources and miscommunication, long bureaucratic procedures are created for simple tasks. Last, it is mentioned the problem of co-financing required for some projects and the poor communication with partners. The obstacles identified by the interviewees raise questions regarding the country's institutional capacities to absorb EU funds effectively. Acemoglu and Robinson (2012) argue that it is first needed to have good quality political institutions that provide essential public services for a nation to have economic growth. From what is evident from the empirical data, some areas in Albania lack this pre-requirement.

By all means, the IPA II financial aid contribution has been extremely helpful in assisting the country towards the EU path, but Albania has not reached accession. On the research question how the institutional capacities of Albania affect the utilization of the EU Pre-Accession Assistance II funds for the period 2014-2020, a clear pattern can be noticed in Figure 7 and Figure 8 where the development of a region appears to depend on the quality and form of the institutions it has. Therefore, areas with strong inherited informal institutions struggle to adopt

54 new growth-igniting institutions launched by external forces such as the EU. This might be due to the failure of the natural metamorphosis of the informal rules to formal institutions, as discussed by (North, 1990). It is needed a better examination of the regions in Albania to identify the core informal institutions that still have an influence over behavior and affairs. Like Interviewee 5 said, Albanians have been living for so long under informal institutions that have been part of the culture and heritage, ignoring them is not the solution; they need to be addressed and harmonized with the formal institutions in order to support Albanian’s journey to accession.

Despite the clear pattern noticed in the data, the generalizability of the results is limited by two factors: the characteristics of the study participants since they are all active at the local level, and second, the size of the sample. A larger sample population and interviews with civil servants working on the national level would have given a deeper picture of the influence institutions have over the utilization of IPA II funds. However, the methodological choices were constrained by the current global pandemic of Covid-19 and lack of time. Although, the empirical results generated in this study seems to provide sufficient evidence of the role of the informal institutions when it comes to the effective absorption of the EU funds and economic growth. Further research on this topic that will also include data from the national and EU level would assist into identifying in more detail on how much the informal institutions of a region are taken into account before a program is run and also what would be the most optimal way to help the country achieve accession.

In conclusion, considering the research question and the New Institutional Economics theory, the study indicates that well defined formal institutions create the basis for economic growth, but informal institutions matter too.

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11. Appendices Appendix A Question used during the interviews. Interview questions 1. Does Albania have the institutional capacities to deal with the EU funds under IPA II more effectively?

2. In your view do you see any improvement in institutional capacity building? a. Yes? Can you please explain? b. No? Can you please explain?

3. Do you think that IPA II has contributed to social economic and regional development? Please state your reasons.

4. Do you see Albania as deep rooted in customs and norms?

5. Do you see the (informal) institution of Kanun playing a major role in promoting or obstructing IPA II effectiveness?

6. Do you think informal institutions (Kanun, customs, tradition, conventions, etc.) influence the behavior of people in Albania?

7. Can you comment of how development programs initiated by EU address the informal institutions in the country?

8. In your view are there obstacles in the implementation of the program? a. Can you identify these obstacles?

9. Does the issue of property rights play a major role in social and economic development? If yes, can you explain how?

10. To what level has the IPA II program has achieved success? From a scale from 1 to 10.

11. Where do you think the challenges are and what do you think the future course of action should be?

12. In your opinion to what extent the project has achieved institutional capacity building from a grade from 1 to 10?

13. Would you like to comment further on something I have not touched upon that you think it is important?

Appendix B An example template used for the cofding system. The orginal document can be provides upon request.

Questions and Color Codes Category Results Points answers (-1 0 +1) (Example) (Example) (Example) Question 1 Patterns, • Informal North: repeated institutions Answer 1 words, and • Formal Answer 2 phenomena, Institutions Answer 3 what the • Property rights Centre: interviewee • Progress Answer 1 stresses as • Stagnation Answer 2 important, • Obstacles Answer 3 relevant to the • Administrative South: theory etc. • Capacities Answer 1 • Shadow Answer 2 economy Answer 3

Appendix C Table of administrative devision during the Ottoman Empire. At number 27, 28 and 29 one can see the administrative devision of the Albanian land.