<HTML> <HEAD><TITLE>Albanian House of Cards</TITLE></HEAD> <BODY BACKGROUND="../../images/backgrnd/weblogo.gif"> July/August 1997 <H1>The Albanian House of Cards</H1> <H3>by Fred Abrahams</H3> In early 1993 a journalist with the Albanian Economic Tribune visited Albania's Finance Ministry to collect figures on the country's macroeconomic development. Confident officials provided him with rosy statistics showing that Albania had reduced inflation, stabilized its currency and promoted growth since the first post-Communist government took power in March 1992. In the Ministry's bathroom, however, he discovered another picture. As was common in Albania, old papers lay in a plastic basket for use next to the toilet. Among them was a draft report that presented a far less optimistic picture of the economy than the official figures he had just been provided. Like any good journalist, he took the documents and ran them in his magazine. Later someone joked that this was the beginning of yellow journalism in Albania. Unfortunately for Albanians, it is not much of a joke. After 1992, the Albanian government, Western governments and international financial institutions presented Albania as the "economic miracle of Eastern Europe," pointing to an 11% growth rate (the highest in the region), low unemployment and a stable currency. But nobody mentioned the first drafts of the economic reports that were ending up in ministry wastebaskets. Industrial production was near zero, almost half the GDP was from foreign aid or the remittances of Albanians working abroad, and the trade deficit was soaring. Furthermore, the country's so-called success was based to a large extent on drug smuggling, gunrunning, sanctions busting, people trafficking and the now infamous pyramid schemes that sprouted like mushrooms in the Albanian soil. The Albanian economy was literally in the toilet Now the big lie has come to a crashing halt. The collapse last December of the pyramid schemes sparked the destruction of Albania's economic and political order, revealing the farcical nature of Albania's "miraculous" recovery from half a century of isolationist Stalinism. The country is more devastated than in 1991, when communism allegedly beat a hasty retreat. Once again, some Albanians are relying on humanitarian aid to put food on their tables. Unlike in 1991, however, hundreds of Albanians have died from political or criminal fighting. To the casual observer, the Albanian economy was improving by leaps and strides. A country that banned private property for 45 years soon boasted a plethora of cafes, boutiques and restaurants -- many of them full. In 1992, Tirana, the capital, had one nonfunctioning traffic light that dangled helplessly over horse carts and bicycles in the center of the city. Today used Mercedes Benzes clog the city's streets. But a more careful look revealed how superficial the economic recovery of the first go-go capitalist years really was. With a few exceptions, notably the flavorful Tirana beer, domestic production was at dismally low levels. Most of the goods in Albanian shops were imported from neighboring countries, especially Italy, Greece and Turkey. At the same time, about 15% of the GDP was from remittances of those working abroad. In this way, lira and drachma earned by Albanians in Italy and Greece were spent on goods produced out of the country, so that little of the money seeped into the local economy. At the same time, foreign investment was disappointingly low. Despite aggressive advertising campaigns by the Albanian government, foreigners remained leery of political instability (especially during the war in the former Yugoslavia), a shaky legal system and the widespread corruption that was part and parcel of doing business. The rapid but superficial growth of Albania's economy is best illustrated by the phenomenon of kiosks -- the prefab metal and glass huts that sprang up throughout the country selling everything from cigarettes to Turkish cookies. Indistinguishable from one another, they represent the crude service sector -- all providing the same service -- without any strategic planning or growth in domestic production. Even the kiosks themselves were imported. In Tirana, they overran the once attractive central park, leaving a greenless mall in the center of town. But the biggest problem was the corruption, which spread like a cancer to all levels of society. The most closed and repressive country in Eastern Europe, Albania quickly became the "wild East" -- a place where local and foreign entrepreneurs could meet greedy government officials in an unregulated land rich with natural resources and cheap labor. Poorly paid policemen, a long coast and proximity to Western Europe made it the ideal location for illegal trade, including oil smuggling in violation of the U.N. embargo to the war-torn "rump" Yugoslavia (Serbia and Montenegro). Pyramid schemes are only the most flagrant example of this corruption. The Western press portrayed them as classic pyramid schemes -- where investors are repaid from the money provided by an ever-widening group of investors. The Albanian pyramids were, in fact, a far more complex organism. First, they involved a very large number of people. An estimated 60% of the population invested approximately $1.5 billion in the funds, sometimes by selling their property, livestock or family heirlooms. Stories of relatives and neighbors making easy money spread through the country's cafes until even the most skeptical investor could not resist the temptation. Second, unlike other pyramid schemes that were born and died throughout Eastern Europe since the fall of communism, Albania's schemes managed to thrive for three years. In a country of 3 million, it is surprising that enough new investors were found to keep the funds rolling. Now evidence is beginning to emerge that the pyramids stayed afloat because of fresh funds from a variety of illegal and often unstable sources, some of them involving the government. The first was the smuggling of oil to Yugoslavia that began when the U.N. established its embargo in 1992. Even while the Albanian government was condemning the rump Yugoslav government for its mistreatment of the Albanian minority in Kosovo, a company run by the ruling Democratic Party (DP) was supplying Yugoslavia with oil through pipelines across the northern border. Donkeys tugged barrels of crude oil through the mountains while rickety boats floated their loads across Lake Shkoder. The southern city of Vlora, the center of the uprising sparked by the collapse of the pyramid schemes, was a center of smuggling activity to Italy and other parts of the Mediterranean. The coast from Vlora to the Greek border was the departure point for Albanian-produced arms that appeared in Rwanda and drugs distributed by Albanian families in Switzerland. Most obvious, however, was the steady flow of people who sought a better life in the West. A casual stroller along the beach in the South would encounter speed boats packed with Albanians, Kurds and Chinese who paid $250 for the two-hour ride across the Adriatic Sea to Italy. Without a doubt, Albanian government officials and opposition parties in municipal governments tolerated this activity, either because they benefitted directly or because stopping the schemes would have been political suicide. The government even encouraged people to invest in the pyramids. Government ministers promoted the "investment companies," as they were known, on state television; not surprisingly Albanians interpreted this as a sign of government support. The head of the largest company, Vefa Holding, was Albania's official representative to NATO's North Atlantic Assembly. This January, amidst public doubts of the schemes' legitimacy, President Sali Berisha, a cardiologist who once headed his hospital's party cell, stated on television that "the Albanian money is the cleanest in the world." As an Albanian journalist commented, "If you charted the level of investments, I am sure you would see a dramatic increase after Berisha's words." Other politicians from the president's party (the DP) were less subtle. One candidate from Vlora in the 1996 parliamentary campaign displayed posters of himself surrounded by the logos of the pyramid schemes over the slogan: "With the DP everybody wins." With such posters and public statements, the Albanians thought that the government would never allow the schemes to collapse. Opposition political parties and the press did their part by failing to debunk what everybody knew were unsavory dealings -- the leading independent newspaper even made the head of Vefa Holding its 1996 Man of the Year. Albanians also interpreted the international community's support for President Berisha -- from the European Union, Council of Europe and, until recently, the United States -- as a kind of international FDIC for the schemes. Evidently some foreigners shared this feeling: Foreign missionaries, Yugoslav border guards and even some Western diplomats did not hesitate to invest. Why the schemes collapsed remains an open question. One plausible theory is that the lifting of U.N. sanctions against rump Yugoslavia in October 1996 killed Albania's income from oil smuggling. Albania held a firm grasp on the oil export market to the former Yugoslavia -- as long as the U.N. embargo remained in place. With the U.S.-brokered peace accords and the end of the embargo, international competition came to the business of supplying oil to the area, reducing a major source of income to Albania. The six major pyramid schemes gradually engaged in an interest war, which peaked in December 1996 and January 1997 with interest rates as high as 80%. They couldn't keep paying out money. Regardless of the reason for their collapse, people blamed the government for stealing their money or, at least, not protecting it. When President Berisha responded with violence to their peaceful demonstrations, an ever-intensifying spiral of protests and repression brought the country into its current crisis. Meanwhile, the local leaders of the schemes were considered heroes for having given people a sense of dignity and pride. In the town of Lushnje, for example, the head of the Xhaferi company, a former general in the army, had purchased the local soccer team, renovated the stadium and attracted Latin American and African stars to play, including a former World Cup hero from Argentina. When he was arrested in December, crowds gathered in front of the town hall demanding the release of "The General"! Western governments knew of this impending collapse, even if no one predicted the calamitous results. Western press reports indicate that some governments were aware of the vast pyramid-linked corruption, including the names of ministers who were involved, but decided to look the other way in order to help an ally in the region. Not only did they turn a blind eye, but they lavished the country with aid. The European Union gave Albania more aid per capita than any other Eastern European nation. The United States kicked in $236 million since 1991, two thirds of it dedicated to promoting private enterprise and financial reform! In return, a friendly government in Albania allowed NATO to maintain military bases in the turbulent southern Balkans, and encouraged moderation among the 2.5 million ethnic Albanians living outside Albania in the neighboring hot spots of Kosovo and Macedonia in the former Yugoslavia. Now refugees are fleeing to Italy and Greece, and arms are proliferating in Albania and possibly abroad -- the last thing the sensitive Balkans needed. A multinational military force led by Italy and sanctioned by the United Nations went into Albania to protect the delivery of humanitarian aid, assert calm until new elections on June 29 -- and to stop the flow of refugees. This aim also led to the catastrophic sinking of an Albanian refugee ship when the Italian coast guard tried to block it. Approximately 80 refugees died. The prospects for democracy and improvements in Albania's economy are bleak. Most state institutions have crumbled and lawlessness rules much of the countryside. There is still no domestic production and foreign investment hovers near nil for the foreseeable future. Thousands of young Albanians have fled, further draining the country of its future talent. The only possible benefit may be the foreign currency that they can send home -- if the West allows them to stay.  <CENTER> <A HREF="../../subscrib.html"><IMG SRC="../../images/ds/subnow.gif" border="0" ALT="Subscribe Now!"></A> </CENTER>  <CENTER> <A HREF="../../"index.html" target=_top>Home Page</A> <IMG SRC="../../images/nav/arrow.gif" border="0" ALT="--&gt"> <A HREF="../tocissue.html">Recent Issues of D&S</A> <IMG SRC="../../images/nav/arrow.gif" border="0" ALT="--&gt"> <A HREF="tocjul97.html">Jul/Aug 1997 TOC</A> <IMG SRC="../../images/nav/arrow.gif" border="0" ALT="--&gt"> House of Cards </CENTER>  <CENTER> <a href = "javascript:history.go(-1)"><img src = "../../images/nav/back.gif" border = 0 vspace=5 hspace=5 ALT="back"></a> <a href = "javascript:history.go(1)"><img src = "../../images/nav/forward.gif" border = 0 vspace=5 hspace=5 ALT="forward"></a> </CENTER>  <CENTER><HR size=1 width =200 no shade> Copyright 1997 the Economic Affairs Bureau, Inc. 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