Report No. 29257-AL Report No. 29257-AL Albania Sustaining Growth Beyond the Transition Public Disclosure Authorized Public Disclosure Authorized A World Bank Country Economic Memorandum December 27, 2004 Poverty Reduction and Economic Management Unit Europe and Central Asia Region AlbaniaTransition the Beyond Sustaining Growth Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank Public Disclosure Authorized Public Disclosure Authorized CONTENTS ACKNOWLEDGMENTS ............................................................................................................. 1 EXECUTIVE SUMMARY ............................................................................................................ i CHAPTER 1: INTRODUCTION ................................................................................................ 1 CHAPTER 2: SOURCES. PROSPECTS AND CONSTRAINTS TO GROWTH ................. 7 1. Background: A Short Story of Transition ................................................................................ 7 2. What is Driving Albania’s Growth Performance? ................................................................. 17 3 . Sectoral Potential for Growth ................................................................................................ 25 4 . Long Term Growth: Prospects and Constraints ..................................................................... 33 CHAPTER 3: TRADE AND INTEGRATION ......................................................................... 41 1. Trade and Foreign Investment in Albania .............................................................................. 41 2. Policies to Boost Trade Integration........................................................................................ 48 CHAPTER 4: THE ROLE OF MIGRATION AND REMITTANCES ................................. 57 1. Patterns of Internal and External Migration ........................................................................... 57 2. Macroeconomic Impact.......................................................................................................... 63 CHAPTER 5: MOBILIZING LABOR RESOURCES ............................................................ 69 1. Profile of the labor market ..................................................................................................... 69 2 . Inadequate Supply and Low Demand for Human Capital ..................................................... 78 CHAPTER 6: REMOVING PUBLIC INFRASTRUCTURE BOTTELNECKS .................. 89 1. Poor Quality of Infrastructure ................................................................................................ 89 2. Public Infrastructure Priorities ............................................................................................. 100 CHAPTER 7: GOVERNANCE FRAMEWORK FOR GROWTH...................................... 107 1. Governance and institutional challenges .............................................................................. 107 2 . Policies to Improve Governance and Strengthen Institutions .............................................. 114 CHAPTER 8: MACROECONOMIC FRAMEWORK FOR GROWTH ............................ 121 1. Macroeconomic and Financial Constraints .......................................................................... 121 2 . Policies to maintain macroeconomic stabilization............................................................... 128 CHAPTER 9: CONCLUSION ................................................................................................. 133 ANNEX ....................................................................................................................................... 135 Text Boxes Box 1: Selected Promising Agricultural Products Box 2: A CGE Model for Trade Simulations: Data Sources Box 3: FIAS Recommendations for Removing Administrative Barriers to Investment Box 4: Dealing with Inconsistencies in Labor Market Statistics Box 5: Human trafficking in the Balkans Box 6: Tax Reforms Proposed by the IMF List of Figures Figure 1: Albania Real GDP (1990= 100) Figure 2: Fiscal Consolidation, 1997-2003 Figure 3: Size of the Central Government (1999-2002 average) Figure 4: How the Budget Deficit Has Been Financed, 1997-2003 Figure 5: Real Interest Rate, 12-month Deposit, 1993-2003 Figure 6: Remittances, in Millions of US Dollars, 1994-2002 Figure 7: External Transfers, in Millions of Leks, 1992-2002 Figure 8: Current Account Deficit, 1991-2003, (percent of GDP) Figure 9: Gross National Income per Capita, 1990-2003 Figure 10: GDP Composition, by Expenditures, 1990-2003 Figure 11: Value Added from Agriculture, as Share of GDP, 2000 Figure 12: Sectoral Contribution of GDP, 1990-2003 Figure 13: Relative Contributions to GDP Growth, 1982-2003 Figure 14: Regional Tourism Trends, 1997-2001 Figure 15: Savings-Investment Balance, in percent of GDP Figure 16: Foreign Direct Investment in Albania, in millions of US$ Figure 17: FDI by Sector, 2001 (% of Total) Figure 18: FDI by Country of Origin, 2001 (percent of total) Figure 19: FDI in SEE Countries, 2003 (in million of US$) Figure 20: Urban Adult Male Population by Migration History and Region, April 2001 Figure 21: Employment-related Temporary Emigration of Albanian Men: Rates (left scale) and Average Duration (right scale), 1997-2001. Figure 22: Albanian Men - Short-term Labor Emigrants by Age and Education, April 2001 Figure 23: Effect of District Poverty Rate and Marital Status of Albanian Men on the Predicted Probability of Temporary Work-related Emigration Figure 24: Effect of Place of Residence and Age on Predicted Probability of Temporary Work- related Emigration Figure 25: Remittances and the Trade Balance, 1993-2002 Figure 26: Remittances, in Millions of Leks, 1994-2002 Figure 27: Albania’s Increasing Trade Deficit Figure 28: Demographic Dependency Ratios in Albania and Selected Countries, 2002 Figure 29: Activity, Employment and Unemployment Rates (percent). Men Aged 15-59 and Women Aged 15-54 Figure 30: Registered Unemployment in Albania, 1993-2003 (end of period): Total Number of Unemployed (left sca1e);Number of Unemployed with University Education (right scale) Figure 3 1: Unemployment Rates by Sex and Residence: 1989 and 2001 (Population Census data) Figure 32: Unemployment rates by Residence and Gender, April 2002 Figure 33a: Unemployment Risk for Economically Active Albanians by Age Group and Residence, April 2002-Men Figure 33b: Unemployment Risk for Economically Active Albanians by Age Group and Residence, April 2002-Women Figure 34a: Unemployment Risk for Economically Active Albanians (students and pensioners excluded) by Years of Schooling and Residence. April 2001--a) Men, aged 25-34 Figure 34b: Unemployment Risk for Economically Active Albanians (students and pensioners excluded) by Years of Schooling and Residence. April 2001--b) Women, aged 15- 64 Figure 35: Unemployment Risk for Economically Active Albanian Women (students and pensioners excluded) by Age and Educational Attainment, April 2001 Figure 36: Geographical Mapping of the Poverty Headcount Figure 37: Traffic Deaths per 10,000 Vehicles Figure 38: Level of Obstacles Faced by Businesses in Albania in Various Areas Figure 39: Government Revenue and Tax Revenue in a Sample of Countries Figure 40: CPI-Based Real Effective Exchange Rate, 1994-2004 Figure 41: Annual Growth Rate of the Money Supply, 1994-2003 Figure 42: Labor Productivity , 1992-2003, Thousand Leks/Employee Figure 43: exports to GDP, 1993-2003 (percent) List of Tables Table 1: Albania versus Other SEE Countries Table 2: Main Economic Indicators, 1990-2003 Table 3: Progress on Structural Reforms-2003 Table 4: Agricultural Production, 1993-2003-Field Crops (thousand tons) Table 5: Livestock, 1998-2003 (thousands) Table 6: Sectoral Composition of GDP, 1990-2003 Table 7: Albania Growth Accounting Results I(without adjustment for permanent scrapping of significant part of communist capital) Table 8: Panel A: Albania Growth Accounting Results I1 Assuming significant part of communist capital is permanently scrapped during 1990-92 Table 8: panel B: Albania Growth Accounting Results I1Assuming capital share of 0.50 and permanent Scrapping of Communist Capital Table 9: Composition of trade with the EU and ROW in 1996, 1998, 2002 and 2003 (in percent and thousands of US dollars) Table 10: Factor Intensity of Albania's Trade with the European Union, 1996-2003 Table 11: Customs Revenue Collected, 2001-2003 (US$ millions) Table 12: Revenues from the Tourism Industry, 1999-2002 Table 13: Comparison with Higher Growth and Slower Growth Countries Table 14: Estimated Neoclassical Growth Equation Table 15: Predicted Long Run Growth Rates for Transition Economies Table 16: Performance of SEE-5 economies in EU markets in 1993-2003 Table 17: Trade in Textiles/Clothing and Footwear, 1996-2003 (in thousand of US $ and percent) Table 18: Trade in parts and share of EU (in 000 of US dollars and percent) Table 19: FDI inflows. Total and Total per capita over 1990-023, Average Annual per Capita in 1993-96, 1997-2000 and Annual per Capita in 2000-03 (in US dollars) Table 20: Annual FDI Inflows in Million of US Dollars and in Percent of GDP, 1993-2003 Table 21: Implications of the SAA with the EU Table 22: International Trade Implications Under Short-Run Scenarios (percentage change relative to 2000 performance) Table 23: Output Changes under Short Run Scenarios (percentage change relative to 2000)