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 1 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. 2 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 3 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 4 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