5. Multi-dimensional analysis of development in Albania

Abstract

Achieving rapid, inclusive and sustainable development requires progress across a range of development domains. This chapter identifies major development constraints in Albania. It builds on multi-dimensional analysis across the five pillars of the Sustainable Development Goals: People, Prosperity, Partnerships and financing, Peace and institutions, and Planet. For each pillar, the analysis highlights key areas where Albania could further realise its full development potential.

This chapter of the MDR of the Western Balkans identifies the key capabilities and most pressing constraints in Albania by linking economic, social, environmental and institutional objectives. The assessment is organised around five thematic sections based on the five pillars of the 2030 Agenda: People, Prosperity, Partnerships and financing, Peace and institutions, and Planet. Whenever relevant, Albania is compared with a set of benchmark economies in the region (Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia), the OECD (Costa Rica, Czech Republic, Greece, Slovak Republic, Slovenia and Turkey), non-OECD economies in the European Union (Croatia and Romania) and non-OECD economies in other regions (Kazakhstan, Morocco, Philippines and Uruguay). It includes regional averages for the Western Balkans and OECD and EU members.

People – towards better lives for all

The People pillar of the 2030 Agenda for Sustainable Development places quality of life at the centre stage, focusing on the international community’s commitment to guaranteeing the fulfilment of all human beings’ potential in terms of equality, dignity and good health. Albania’s economic and political transition has brought several improvements for citizens: standards of living have improved, labour markets are transforming and providing more jobs, and various promising reforms in the social protection and healthcare sectors have recently been undertaken.

However, to improve the long-term prospects of citizens, Albania will need to ensure equal participation of all groups and regions in labour market and education, build the capacity of local authorities and improve the quality and efficiency of public services, including the health and social protection systems. There remains room for improvement in gender equality, particularly in the areas of discrimination in the family, safety and preference for male children. The People section in this chapter identifies five major bottlenecks to well-being (Table 5.1).

Table 5.1. People – five major constraints to leaving no one behind in Albania
1. Remote Albanian regions are left behind in terms of employment opportunities and access to services, and local authorities’ capacity is low.
2. Lack of skills and weak labour market institutions result in low employment inclusiveness, particularly for women and young people.
3. The healthcare sector places a high cost burden on patients, many of whom have no insurance.
4. Healthcare governance needs more resources in terms of medical staff, dynamic management and infrastructure.
5. Many promising social protection reforms have recently been undertaken, but social assistance benefits are too modest and need to be integrated with care services.

Improving well-being for all, everywhere

Living standards in Albania have risen modestly in the past decade, but social exclusion and inequality remain issues. After strong growth rates before the 2008 global financial crisis, annual GDP growth dropped from 7.5% in 2008 to 1% in 2013 (World Bank, 2020[1]). Economic growth has started to pick up again, albeit to below pre-crisis rates, while household consumption has risen at a slower pace than GDP per capita. There are no comparable time series on poverty and inequality, but findings from the latest round of the European Union Statistics on Income and Living Conditions survey showed that inequality was above the regional average and that close to 40% of households were severely materially deprived (Figure 5.1). Some 23.4% of the population was at risk of poverty in 2018 (INSTAT, 2019[2]). Poverty particularly affects the unemployed, the low-skilled, people in rural areas, vulnerable women, people with disabilities, and Roma and Egyptian minorities.

Roma and Egyptians trail behind the rest of the Albanian population in well-being outcomes. They participate marginally in the labour market, have very low health coverage and have poor access to education, public services and infrastructure, such as piped water and electricity, particularly in rural areas (European Commission, 2019[3]). While Albania has made progress in expanding access to piped water services and sewerage systems in urban areas, only 58.5% and 15% of Albanians in rural areas had access to drinking water and sewerage services, respectively. The former figure drops to 46% for Roma. To address these challenges, the government undertook important initiatives in recent years. The implementation of the 2016-20 national action plan for the integration of Roma and Egyptians is ongoing, and the Ministry of Health and Social Protection is in the process of drafting a follow-up strategy in 2021. The Ministry of Finance and Economy approved a 2018 Law “On social housing” that requires that a quota of 5% of housing be reserved for the most vulnerable members of Roma and Egyptian communities. The Social Housing Strategy 2016-2025 also targets women, victims of violence, orphans and the lesbian, gay, bisexual and transgender (LGBT) community.

Figure 5.1. Household spending has risen, but inequality and material deprivation remain high

Regions in Albania (qarku) vary significantly in economic development and well-being outcomes, and gaps continue to widen as people move between regions. GDP per capita in Tirana, which accounts for 52% of all jobs, is more than twice that in Kukës, the poorest province (Table 5.2). There are also large regional inequities in access to social security and health insurance: coverage is up to five times higher in Tirana than in other qarku (INSTAT, 2019[5]). Social services, which are the responsibility of local governments, are either underdeveloped or absent in many parts of Albania due to poor capacities and local authorities’ lack of experience. The net pre-primary level enrolment rate has greatly increased since 2000, reaching about 78.9% in 2019, or 80% among male and 76% among female children (INSTAT, 2020[6]; UNESCO, 2020[7]). However, pre-primary enrolment is low in rural areas and among children with disabilities and from minority communities. The quality of teaching staff and the physical condition of preschools remain key challenges (Fuller, 2017[8]; Maghnouj et al., 2020[9]). Unbalanced regional development partly relates to weak implementation of decentralisation policies and to poor overall capacities of municipalities (see the Peace and institutions section in this chapter).

Table 5.2. Regional development varies significantly
Selected indicators, 2018
Region (qarku)	Population (total)	Population (%)	GDP per capita (USD¹)	Net internal migration rate per 1 000 inhabitants	Employment rate	Job distribution (% of total jobs)	Poverty headcount (2012)	Doctors per capita
Tiranë	889 578	31.7	7 065	8.1	48	52	13.9	1.5
Fier	296 446	10.6	5 258	-3.0	58	7	17.1	1.1
Durrës	289 877	10.3	5 069	2.8	48	12	16.5	1.4
Elbasan	276 765	9.9	3 565	-4.6	61	5	11.3	1.1
Korçë	209 034	7.5	3 811	-4.0	63	4	12.4	1.2
Shkodër	203 945	7.3	3 679	-2.3	57	5	15.5	1.1
Vlorë	126 294	4.5	4 294	-7.8	56	5	11.1	2.0
Berat	126 294	4.5	4 265	-7.8	66	3	12.3	1.3
Lezhë	125 998	4.5	3 792	-2.3	42	3	18.4	1.2
Dibër	119 963	4.3	3 830	-13.6	46	2	12.7	0.9
Kukës	76 994	2.7	3 093	-8.8	61	1	22.5	1.3
Gjirokastër	62 188	2.2	5 183	-13.4	63	2	10.6	1.9
Note: 1. At September 2019 exchange rates.
Sources: Honorati et al. (2018[10]), Job Dynamics in Albania: A Note Profiling Albania’s Labour Market, http://documents.worldbank.org/curated/en/209671528985738916/pdf/Albania-Job-Dynamics-Final.pdf; INSTAT (2019[5]), Regional Statistics Yearbook, 2019, www.instat.gov.al/media/6470/rsy_compressed.pdf.

Lesbian, gay, bisexual, transgender and intersex (LGBTI) communities face continued discrimination and harassment. Albanian society remains rather conservative and negative in its attitudes towards LGBTI people. According to a 2015 population survey, 42% of Albanians believed homosexuality is a sickness and would try to help their child find a cure if they found out he or she was not heterosexual. The 2012 European Social Survey asked, “Should gays and lesbians be free to live as they wish?”: 23% of Albanian respondents disagreed, and 30% strongly disagreed, demonstrating the greatest antipathy among countries surveyed (no other Western Balkan economy participated) (ERA – LGBTI Equal Rights Association for Western Balkans and Turkey, 2020[11]). Some 65% of LGBTI people in Albania have been personally discriminated against because of their sexual orientation or gender identity (ERA – LGBTI Equal Rights Association for Western Balkans and Turkey, 2020[11]).

Existing legal provisions to protect LGBTI rights can be strengthened. As of 2010, Albania has a Law “On protection from discrimination”, which includes protection based on sexual orientation and gender identity. However, it has not yet been fully implemented by state institutions, no data collection on hate crimes exists, and few victims report acts of discrimination out of fear of reprisal or lack of trust in public officials (ERA – LGBTI Equal Rights Association for Western Balkans and Turkey, 2020[11]). In 2015, the parliament passed a resolution recommending the adoption of a national LGBT action plan, diversity training for teachers and greater support for the ombudsman and CSOs. However, the plan has come to an end in 2020 and has not been found to have produced tangible results, partly due to a lack of financial resources (European Commission, 2020[12]).

Strengthening the productive potential and equal participation of all citizens

Albania’s overall employment performance has improved in recent years but remains low. Following fluctuations after the 2008 global financial crisis, the employment rate increased from 46.1% in 2015 to 53.6% in 2019 and was above the 2019 Western Balkan average of 43.1% (World Bank/Vienna Institute for International Economic Studies, 2020[13]). Due to increase labour market participation, the unemployment rates in the last quarter of 2019 were at the historical low at 11.2% (INSTAT, 2020[14]), As in all countries, the economic impacts of the COVID-19 crisis in Albania are likely to lead to job losses in the medium term.

Many women and youth are excluded from the labour market and wider society

Despite positive recent trends, the Albanian labour market continues to face structural challenges that slow down productivity and growth and are a source of social concern. A substantial proportion of young people find themselves outside education and the labour market, and women’s labour market participation is unequal. Albania recently adopted the National Strategy for Employment and Skills 2019-2022, which provides a good strategic basis for increasing the inclusion of women and youth.

Although women’s employment outcomes do not lag significantly behind international benchmarks, Albania is far from achieving gender equality, and social norms and limited access to child care continue to keep women at home. The inclusion of women in the labour market has grown steadily over the last five years. In 2019, about 46.9% of the female population over age 15 was in employment, only slightly below the OECD average of 49.9%. However, women in Albania are over-represented in informal employment (66.5% of women vs. 60.1% of men) (ILO/Bureau for Employers’ Activities, 2017[15]). Gender gaps in formal employment are particularly high for women in their childbearing years: in 2018, the employment rate for women aged 25 to 29 was 54.1%, accounting for a gender gap of about 19.3 percentage points with men (Figure 5.2), compared to 68% and 14.5 percentage points in OECD countries (World Bank/Vienna Institute for International Economic Studies, 2020[13]).

Family responsibilities, discouragement and lack of access to child care are key reasons for women’s lack of participation in the formal labour market (Honorati et al., 2018[10]). Albanian women spend more than six times more time on unpaid household chores than men, compared to around two times more in comparable regional economies, such as Serbia, and the OECD average (OECD, 2019[16]). A 2017 revision to the Law “On social security” recognised fathers’ right to paternity leave, after the 63-day mandatory period for mothers (paid parental leave for formal-sector employees can be up to one year, compared to just over 18 weeks for the OECD average) (Ministry of Health and Social Protection/INSTAT, 2020[17]; OECD, 2019[18]) However, according to the recently published Gender Equality Index for the Republic of Albania, half of women but only one-quarter of men report caring for their children or elderly relatives, and close to 90% of women but only 16% of men cook daily (INSTAT, 2020[19]). Not surprisingly, after attending school, unpaid work responsibilities rank as the second-highest reason for women’s lack of participation in the labour market (21%) (INSTAT, 2019[20]). Employment gender gaps are also significant for women aged 55 to 64, with many choosing to accept early retirement. As a consequence, this choice lowers the amount of pension benefits and results in an increased pension gender gap (as of 2014, pension reform linked contributions and payments by removing caps on maximum benefits). The gender pay gap (10.7% in 2018) is below the OECD average (12.9%) but has widened by 4.4 percentage points since 2016 and varies across professional sectors: it is much larger for well-paid occupations, such as management (Figure 5.2).

Figure 5.2. Age and occupational choice shape women’s employment experience

Female representation in politics and private-sector management is far from parity but is on par with the OECD for politics and above the OECD for management. Aided by a 2008 gender quota, one in three parliamentary seats is currently occupied by a female member, and women make up one-third of senior and middle managers, compared to the OECD average of 16% (IPU, 2020[21]; OECD, 2020[22]; World Bank, 2020[1]).

According to the OECD Social Institutions and Gender Index, discrimination against women overall in Albania is “low”, but there is room for improvement in the areas of discrimination in the family and safety (OECD, 2019[16]). Some 7% of girls aged 15 to 19 are or have been formally or informally married, many of them Roma and living in rural areas (OECD, 2019[16]). Although the majority of these marriages occurs at age 18 and 19, the share is still higher than in any other Western Balkan economy and almost four times the rate of child marriage of the average OECD country (INSTAT, 2020[6]). Estimates vary by survey, but gender norms that normalise violence against women seem prevalent: according to the OECD Social Institutions and Gender Index, 30% of Albanian women considered a husband justified in hitting or beating his wife for trivial reasons, such as burning food, going out without telling him or refusing sex, compared to 8%, on average, in OECD countries (OECD, 2019[16]). According to the latest Institute of Statistics survey on violence against women, one in two women reported that all or most people in the community believed that violence between a husband and wife was a private matter and that others should not intervene, and 46.5% maintained that all or most people in the community believed a woman should tolerate some violence to keep her family together (INSTAT, 2019[23]). These social norms can contribute to the prevalence of intimate partner domestic violence against women and keep battered women trapped in abusive and violent relationships. Indeed, the same survey found that 8.6% of women aged 18 to 74 currently experience at least one type of sexual harassment, and 38% had been exposed to harassment or sexual assault during their lifetime. In 2019, the European Commission recommended revising the definition of rape; ensuring protection, rehabilitation and reintegration measures for victims of all forms of sexual violence; and ensuring full implementation of Law No. 47/2018 “On Measures against Violence in Family Relations” through the development of by-laws, allocation of sufficient resources and training of relevant staff to ensure adequate support for victims (European Commission, 2020[12]).

Gender-biased sex-selective abortions continue to take place in Albania. Preference for male heirs, rapidly declining fertility rates and sex-selective abortions have skewed the birth sex ratio: 111 boys born for every 100 girls – one of the highest figures in the region (Figure 5.3).1 Recommended policy actions include monitoring of sex-selective abortions, targeted awareness-raising campaigns (some already undertaken by government) and co-ordination with healthcare providers to prevent abuse of reproductive technologies. Some improvements have been made in the availability and accessibility of contraception, for example by introducing family-planning services as part of general health services and by offering free modern contraceptives (European Commission, 2020[12]).

Figure 5.3. The strong preference for male children in Albania has led to the highest birth sex ratio of all benchmark economies

Albania has a significant share of young people who are not in employment, education or training (NEET), putting them at risk of losing skills, self-confidence and motivation (Figure 5.4). The high share of NEET is a source of concern: at 30.3%, the 2019 share of NEET in Albania was more than double the OECD average and almost triple the EU average. While the overall youth unemployment rate in Albania dropped in 2020 and is among the lowest in the Western Balkans,2 in 2018, the overall unemployment rate among younger members of the labour force was about 28.3% – more than double the OECD average of 12%. Long-term unemployment is another challenge. The share of those who have been without employment for one year or more was about 64.4% in 2019, also significantly higher than the OECD average (25.8%). This affects particularly the young: about 41% of people aged 15 to 24 are long-term unemployed, compared to an OECD average of 14.4% (OECD, 2020[25]; World Bank/Vienna Institute for International Economic Studies, 2020[13]). The young often work without adequate contracts, and an estimated 52.6% of those aged 15 to 24 worked informally in 2019 (World Bank/Vienna Institute for International Economic Studies, 2020[13]). Strengthening pre-university career orientation and providing additional support to young graduates to become entrepreneurs could favour better matching between graduate skills and labour market needs and improve employment prospects. One pillar of the recently approved National Employment and Skills Strategy 2019-2022 seeks to improve the quality vocational education and training (VET) and to provide more training to youth.

Figure 5.4. Young workers need to be better integrated into the labour market

Persistent long-term demographic pressures (Figure 5.5), poor inclusion of young people and the migration of many (especially young) Albanians in search of better employment opportunities abroad lead to loss and underutilisation of human capital and drag down productivity growth. Albania is an important origin country of migration, especially to Italy and, to a lesser degree, Greece. There have been a significant number of asylum requests by Albanians, notably in Germany in 2015-16, but they have largely decreased since. More recently, labour migration has increased, in part through a specific scheme that facilitated labour migration to Germany (World Bank, 2017[27]). More than 40% of Albania’s population lived abroad in 2017. Albania’s role as a transit country has been more limited than the other Western Balkan economies (United Nations, 2019[28]).

Figure 5.5. Albania faces demographic pressures in the future

Labour market institutions do not address job quality and demand-supply imbalances

Albania’s labour supply challenges include the widespread incidence of vulnerable and informal employment. The labour market is characterised by significant informality – total informal employment was estimated at about 61% in 2018 (ILO, 2018[30]) – accounting for the large share of unregistered workers, unpaid family workers in the agricultural sector and under-reporting of sales and wages by formal enterprises (Vidovic et al., 2020[31]). Enterprises operating entirely in the grey economy appears to be a significant problem. Data on the extent of informal firm ownership are lacking, but in the latest Business Environment and Enterprise Performance Survey (BEEPS), 45% of surveyed firms listed unfair competition from the informal sector as a major obstacle to business (World Bank/EBRD/EIB, 2019[32]). The government recognises the importance of addressing informal employment and identified it as a priority in the latest ERP (Republic of Albania Council of Ministers, 2019[33]).

Lack of quality formal employment is manifest in poor working conditions in some sectors. Work accidents are among the top five causes of unnatural deaths in Albania (ILO, 2019[34]): in 2015, Albania recorded 2.6 fatal accidents per 100 000 employees, relatively high in comparison to some benchmark economies, including Croatia (1.8), Slovak Republic (1.7) and Greece (1.3).3 Work safety measures need more robust checks and penalties.

Weak and inadequately enforced labour regulation may increase the likelihood of informality and prevents the creation of quality jobs. The labour inspectorate’s capacities are insufficient to monitor adherence to rules: the 154 labour inspectors cover about 7% of active businesses.4 Regulation is not always well designed. Albania also has a highly regressive tax wedge (ratio between the amount of taxes paid by an average worker and the corresponding total labour cost for the employer), which is particularly high for the lowest-income workers and therefore discourages their formal employment. Part-time employment provisions are lacking: even when salaries are below the minimum wage, employee’s social security contributions are still based on this threshold and not on the number of hours worked.5 In 2017, about 29.6% of the employed population was paid less than minimum wage, which is significant (Jorgoni, 2018[35]).

Activation policies are currently too limited and underfunded to connect jobseekers with quality work or to boost their skills. In 2018, Albania spent only 0.03% of GDP on active labour market policies, compared to the Western Balkan average (0.12%)6 and Slovenia and Croatia (0.61% and 0.71%, respectively) (European Commission, 2020[36]). The share of unemployed registered with the National Agency for Employment and Skills (NAES) is only about 43% of all unemployed,7 indicating significant scope to increase coverage. The design of employment promotion programmes, the majority of which are purely wage subsidies, offers limited opportunities for upskilling and sustainable integration into the formal labour market (OECD, 2018[37]). In 2018, 16.6% of jobseekers participated in professional training programmes vs. more than double in OECD countries in 2015 (INSTAT, 2019[20]). Recent restructuring of the NAES, with increased emphasis on skills and collaboration modalities with non-governmental organisations (NGOs) to reach out to vulnerable groups, is encouraging.8

Boosting education quality to increase well-being and quality employment

Investment in education in Albania is comparatively low and does not translate into the education outcomes needed to equip people with relevant skills and optimism. In 2018, the government spent 3.2% of GDP on education in 2019 (INSTAT, 2020[14]; Eurostat, 2019[38]), below the OECD average of 4.5% (OECD, 2019[39]). Albania has made good progress in overall education, as reflected by the OECD Programme for International Student Assessment (PISA), yet its progress is well below average (Figure 5.6). Albania struggles with disparities in education opportunities and outcomes by ethnic background and geographical region. Girls outperform boys in most PISA subjects: by 38 points in reading (compared to 30 points, on average, across OECD countries), by 16 points in science (compared to 2 points across the OECD), and similar in mathematics (compared to boys outperforming girls by 5 points across the OECD) (OECD, 2020[40]). Some 66.4% of higher education graduates in 2018/19 were female (INSTAT, 2020[6]). Improving the population’s skills to meet labour market needs is a key structural obstacle identified in Albania’s 2020-22 ERP (European Commission, 2020[41]).

School closures due to the COVID-19 pandemic and students’ lack of adequate information and communications technology (ICT) equipment and connectivity may have a negative impact on education outcomes. Approximately 27% of 15-year-old students in Albania did not have a computer at home. The number without an Internet connection at home is high (14% of 15-year-old students) (OECD, 2020[40]).

Weak job creation is to some degree related to supply-side constraints, in particular weaknesses in education quality and outcomes and the lack of sufficient alignment of education with labour market needs. Companies cannot generate jobs because they cannot find the skilled workforces needed to fill them. In the latest BEEPS, 25% of surveyed firms identified an inadequately educated workforce as a major (the third largest) obstacle to business (World Bank/EBRD/EIB, 2019[32]).

Figure 5.6. Albania’s education outcomes leave room for improvement

Improving learning outcomes will require further support for teachers. Although the pupil/teacher ratio in primary, secondary and upper secondary education in Albanian is rather favourable (Figure 5.7), the teaching quality remains inadequate. Improving teacher quality is especially important given the recently adopted competence-based curriculum, which emphasises knowledge, skills and attitudes rather than traditionally defined subject content, the requirements to implement it and the increased availability of ICT equipment in classrooms. While the Pre-University Education Strategy 2014-2020 emphasises the need to support teacher professional development, financial support to pre-university education is far behind the strategy’s targets and pre- and in-service trainings for teachers are insufficient.9 University programmes are not yet in line with the Higher Education Law (2018) and the requirements related to the new curriculum (Wort, Pupovci and Ikonomi, 2019[42]). The lack of a progressive career structure for teachers that rewards and promotes individuals based on increasing responsibilities and demonstrated teaching competences (for example through teacher appraisal) also affects teacher quality (Maghnouj et al., 2020[9]).

Figure 5.7. Favourable pupil/teacher ratios are not reflected in education outcomes

Local authorities’ and on schools’ abilities for effective management and quality control need more support. While the Law “On local self-government” stipulates transfer of full responsibility for the preschool education system to municipalities and management of financial resources to schools, both significantly lack capacities. In particular, the four Regional Education Directorates (REDs) – local authorities co-ordinated by the Ministry of Education – lack staff to undertake effective monitoring, inspection and evaluation of quality. Each RED has only four staff dedicated to this work, and they are responsible for a total of 3 759 schools at the primary and secondary levels. Moreover, the REDs do not have the capacity to evaluate and support schools (Maghnouj et al., 2020[9]; Wort, Pupovci and Ikonomi, 2019[42]).

Improving health and social protection coverage

Health outcomes are comparatively good, but the healthcare sector places a high cost burden on patients and suffers from lack of access and resources

While the health outcomes of the Albanian population are strong by regional standards, changing lifestyle patterns and a mortality profile similar to wealthier countries pose risks for the future. Despite the health system’s shortcomings in quality and access, life expectancy at birth is the highest in the Western Balkans at 78.6 years, almost on par with the United States (75.5 years) and outperforming OECD members, such as Slovenia and Turkey (OECD, 2020[44]; World Bank, 2020[1]).

The longevity of Albanians has been credited in part to the economy’s Mediterranean diet, but as in most countries, eating habits are changing. Currently, 18% of men and 24% of women aged 15 to 49 are obese, compared to 19% of adults in the average OECD country (INSTAT, 2019[20]; OECD, 2020[22]; World Bank, 2015[45]). Only 6.8% of women and 2.6% of men consume the daily recommended number of vegetables (three or more). In 2018, 36.1% of women and 14% of men consumed the recommended number of fruits (three or more), and only one in ten adults engaged in frequent physical activity (INSTAT, 2020[6]; INSTAT/Institute of Public Health/ICF, 2018[46]). Although male smoking rates declined by eight percentage points compared to a decade ago, more than one in three still smoke daily, which apart from its known impacts on cardiovascular disease and lung cancer, has been associated with more severe COVID-19 cases (Vardavas and Nikitara, 2020[47]).

Child malnutrition remains a challenge. While relevant indicators have improved since 2008, alongside maternal and child mortality rates, almost one in ten children aged 6 to 59 months are stunted, and 16% are overweight (INSTAT/Institute of Public Health/ICF, 2018[46]). The role of local authorities and primary health care (PHC) providers in intersectoral community health interventions, including awareness raising, should be strengthened to tackle these priority risk factors.

The Albanian healthcare sector suffers from inefficiency and inequity and places large financial burdens on patients. The country spent 5.2% of GDP on health expenditure in 2018, less than the majority of comparable countries (World Bank, 2020[1]). The limited public spending on health care until recent years resulted in an extreme reliance on out-of-pocket (OOP) spending for both inpatient and outpatient care. OOP accounts for close to 60% of total health expenditure and is particularly problematic for low-income households (Figure 5.8). Indeed, for the lowest income quintile, OOP spending on inpatient services can represent up to 60% of total monthly household expenditure (Tomini et al., 2015[48]). Patients often bypass lower-cost (and lower-quality) primary care services to seek care in hospitals or the private sector, where they tend to overpay, particularly for medicines. There is scope to improve pharmaceutical regulation to reduce costs. Additional informal payments for healthcare services, especially in public hospitals and including among patients with health insurance cards, remain common; a recent consumer survey placed Albania top among European countries in this regard (Health Consumer Powerhouse, 2018[49]).

Figure 5.8. Albanian patients pay a significant amount for health services

The government should continue to assess options to expand insurance coverage within the available fiscal space. Universal health insurance is mandated by law in a model reliant on both mandatory and voluntary contributions, but the contribution base is low due to the large informal sector and relies for almost 30% on subsidies from the state budget. Broadening the tax base will be key to expanding revenue streams, including for social protection and health care (see the Partnerships and financing section in this chapter). Nevertheless, one-third of contributing firms, which are required to pay 16.7% of employee salaries in social security contributions, believe that payroll taxes and social security contributions are a major constraint to doing business (World Bank, 2018[50]). Although coverage has improved moderately compared to a decade ago, over 60% of adults aged 15 to 49 reported having no health insurance in 2018. Beyond regional inequities, there is large socio-economic variation in access: fewer than 20% of those in the lowest wealth quintile have either state health insurance or social security, compared to 81% of women and 62% of men with at least postgraduate education (INSTAT, 2019[20]).

The Ministry of Health and Social Protection has taken important recent steps towards de facto universal coverage, but there is scope to reduce inefficiencies, improve quality of care and strengthen management accountability. To reverse over-reliance on hospitals, a national preventive check-up programme and free access to preventive services for the entire population, including uninsured people, were introduced in 2015 and 2017. While these have led to increased use of PHC, a recent review points to long waiting times, the lack of a systematic approach to managing patients with newly detected non-communicable diseases, inefficient co-ordination between PHC and secondary health care, and outdated laboratory and diagnostic equipment (WHO, 2018[51]).

Albania should prioritise personnel PHC management training, selected infrastructure upgrades (including equipment and transport) according to regional needs and an integrated electronic information system that allows for patient follow-up and can stratify by population risk factors. Current policy developments that aim to increase public hospital autonomy to incentivise budget allocation based on performance and cases served rather than static budgets and political appointments of hospital executives should be extended to PHC and could help attract dynamic management (Health Care Insurance Fund of Albania, 2016[52]; WHO, 2018[51]).

Especially in the face of COVID-19-related strains on health systems, the lack of medical staff is problematic. With 1.2 doctors per 1 000 inhabitants – a decline of 14% compared to 2000 – Albania has the lowest number of doctors per capita in the region and is well below OECD and European figures (Figure 5.9). Remote hospitals in particular, which already lack specialists, have seen hundreds of physicians and nurses migrate to work in EU countries, mainly Germany, in the last years (Terziu, 2018[53]). Initiatives recently introduced by the Ministry of Health and Social Protection, such as a patronage programme that gives bonuses to Tiranian doctors practicing in districts and the promotion of specialists to regional and municipal hospitals, are promising but unlikely to suffice in the long term (Curri, 2018[54]). In the context of COVID-19, the government ordered the reactivation of retired healthcare staff, mobilisation of workers from various medical fields, engagement of medical students and residents, and additional financial incentives for the health workers involved in the pandemic response (Order No. 174 and Order No. 175 of the Minister of Health and Social Protection of 15 March 2020). However, no specific measures are being taken to provide psychosocial or other occupational health support for health workers (COVID-19 Health System Response Monitor, 2020[55]). The expansion of telemedicine to increase access to specialist care in remote regions should be considered both during and after COVID-19. A pilot from the International Virtual e-Hospital Foundation NGO has shown promising results in reducing transfers to tertiary centres (Latifi et al., 2020[56]).

Figure 5.9. Albania has comparatively few doctors per capita

Social protection benefits are too modest and need to be integrated with care services

Although Albania’s overall social protection spending has more than doubled since 2005, it remains low. According to the European system of integrated social protection statistics, Albania spent 9.4% of GDP on social protection in 2016, which was much lower than the European average of 28% (ESPN, 2019[58]). The social protection system is dominated by both social insurance schemes (pensions, unemployment benefits) and non-contributory cash programmes (proxy means tested social assistance/economic aid, disability transfers) and has undergone various restructuring efforts in recent years. A 2014 pension reform gradually reduced the distributional character of the scheme and created incentives to participate by removing caps on maximum benefits, linking contributions and payments. Although the scheme ran at a deficit of 1.8% of GDP in 2017, the ratio of contributors to beneficiaries increased from 0.98 in 2013 to 1.21 in 2017 and, combined with an increase in the retirement age for both genders to 67 years, led to an overall improvement of the pension system’s fiscal sustainability.

Very recent reforms to Albania’s non-contributory schemes to improve targeting, efficiency and transparency, such as a National Register of Citizens and efforts to consider broader social and psychological factors associated with disability, still need to be assessed. However, it is clear that spending on social assistance, which has decreased over time and only made up 0.025% of GDP in 2018, needs to be ramped up. Social transfers, excluding pensions, achieved less than a three percentage point reduction in risk-of-poverty rates in 2018 (INSTAT, 2019[2]). The very low amount of benefits should be revised in line with minimum living standards, possibly by redirecting the savings produced by declining pension deficits in the medium term (ESPN, 2019[58]). The government’s sensible longer-term plans to replace purely economic aid with reintegration into labour market systems should be fast-tracked and is indeed included in the recent National Strategy for Social Protection 2020-2023.

Improving the outreach and coverage of social care services, such as childcare facilities, orphanages and nursing homes, is a key missing link in the system. Doing so will help boost both labour market participation and poverty alleviation. Efforts to improve social service delivery must be accompanied by significant capacity building among local governments, which are responsible for social care provision (European Commission, 2018[59]). The recent Law No. 121/2016 “On social care services” aims to set up a dedicated fund. The National Action Plan on Ageing 2020-2024 includes the aim of providing the elderly with access to quality social and health services. A two-year joint programme with the United Nations to improve municipal social protection service delivery went into effect in January 2020, but it is too early to assess implementation (Ministry of Finance and Economy, 2018[60]). Albania’s 2020-22 ERP highlights the need to improve targeting efficiency and to increase cash support and social care to people with disabilities. The European Commission assessment notes that this will be difficult given the scarcity of social care services (European Commission, 2020[41]).

Prosperity – boosting productivity

The Prosperity pillar of the 2030 Agenda for Sustainable Development calls for broad-based economic growth shared by all people. Albania has made significant progress since 1991. As the fastest-growing European economy prior to the global financial crisis, Albania developed and significantly strengthened its political and economic institutions, attracted considerable external capital, fostered investment and growth, and lifted many people out of poverty. However, the momentum for reforms and growth weakened in the post-crisis period, while the crisis unmasked considerable structural problems, such as weak labour markets, lack of skills, weak governance and inefficient public administration, that constrain Albania’s long-term economic potential.

To leverage its strengths and to improve its long-term economic potential, Albania, as a small economy, should seek deeper integration into the global economy. This will require upgrading domestic productive capacities, creating a flexible and skilled labour force, removing institutional and administrative barriers to domestic and foreign investment, and addressing infrastructure gaps (Table 5.3).

Table 5.3. Prosperity – five major constraints to a more dynamic economy of Albania
1. Albania needs new growth drivers to accelerate the structural transformation of the economy and to boost productivity.
2. The tradable sector needs more investment, diversification and upgrading.
3. Lack of skills affects growth and productivity.
4. Institutional and administrative barriers limit domestic and foreign investment.
5. The large infrastructure gap deters investment, especially large manufacturing FDI.

Albania’s growth model requires new drivers to accelerate structural transformation and boost productivity

The growth of Albania’s economy slowed down considerably following the global economic crisis. In the pre-crisis period, strong GDP growth was driven largely by domestic consumption fuelled by strong remittance inflows, high credit growth and lax fiscal policy. As external financing inflows declined, GDP growth fell from a peak of 7.5% in 2008 to 1% in 2013. Despite subsequent recovery, it has not reached pre-crisis levels since (Figure 5.10 – Panel A). Investment also decreased substantially (Figure 5.10 – Panel B). The COVID-19 pandemic will likely have a further negative economic and social impact on Albania, as the economy contracted (IMF, 2020[61]).

Figure 5.10. Albania requires new growth drivers

Productivity growth, a key determinant of long-run growth potential, has slowed down. While productivity tripled between 2000 and 2020 (Figure 5.11 – Panel A), most growth occurred during the first decade of the millennium. New productive activities emerged, and workers moved from less productive to more productive sectors. Productivity gains have slowed down considerably since the mid-2000s, affecting both productivity gains within sectors and gains from the movement of labour to more productive sectors. A shift-share analysis reveals a slightly negative cross-term effect, indicating that within-industry and shift effects have been acting as substitutes; that is, productivity growth has been positive in contracting sectors and negative in expanding sectors (Figure 5.11 – Panel B).

Figure 5.11. Productivity has tripled since 2000, but this growth has weakened during the last ten years, as few workers have moved to sectors with higher productivity

The variation in productivity across sectors remains significant, with most employment found in lower-productivity sectors. The comparative perspective shows the relatively low level of both employment and productivity in manufacturing and the persisting importance of agriculture for employment. New engines of productivity growth will be needed to lift productivity in sectors of broad employment. Sectors currently showing high productivity, such as real estate, finance and mining, have very limited potential for expanding employment (Figure 5.12).

Agriculture needs special attention. The sector is characterised by subsistence farming and is plagued by inefficiencies caused by small land plots and weak consolidation due to inadequately defined property rights (see the Peace and institutions section in this chapter). Consolidation and defragmentation of agricultural land is identified as a reform priority in the latest ERP. Reforms currently under way include improvements in the legal framework and implementation of consolidation projects with a special focus on areas with developed and intensive agriculture (Republic of Albania Council of Ministers, 2019[33]).

Figure 5.12. Lower productivity sectors, particularly agriculture, account for much employment

The firm-level perspective provides a similar picture and calls for addressing the constraints that hold firms back. Albanian firms show much lower productivity than their EU counterparts, and large firms have lower average productivity than SMEs (Figure 5.13). This distribution of productivity levels suggests that many factors that limit the potential of economies of scale are at play, i.e. that size confers productivity advantages, as it does in the European Union. Addressing underlying constraints in the business environment that undermine enterprise investment and growth will be key.

Figure 5.13. Firms of all sizes struggle with labour productivity in Albania

Albania’s tradable sector needs more investment, diversification and upgrading

Over the past decade, the contributions of investment and exports to GDP growth have been relatively limited. While exports have grown by over 30% in real terms since 2014, net exports’ contribution to real GDP growth has mostly been small or negative, reflecting the limited exports basket (predominantly based on footwear and apparel) and consumption’s and investment’s high dependence on imports. Investments also had a very limited contribution to real GDP growth (Figure 5.14).

Figure 5.14. Exports and investments do not drive Albanian growth

The contribution of exports to GDP has improved but leaves room for progress

In 2018, exports accounted for 32% of GDP in Albania, up from 21% in 2020 but below the regional average of 42% (Figure 5.15). The small contribution is also reflected in a current account deficit of 8% of GDP as of 2019 (World Bank, 2020[1]). Albania has not yet sufficiently leveraged its proximity to EU markets and the CEFTA regional trade agreement. Kosovo, Montenegro and North Macedonia export to the CEFTA at least twice as much in goods as Albania (CEFTA, 2020[65]). This is especially a missed opportunity for domestic enterprises, as regional markets tend to account for a significant share of exports for SMEs in other economies in the region.

Exports remain limited to tourism and products with low technological and knowledge content. The exports sector is largely made up of tourism (about 50% of total exports) (WTTC, 2020[66]), labour-intensive manufacturing of footwear and apparel, and raw materials, including minerals, metals and crude oil (INSTAT, 2020[67]). The business process outsourcing sector has grown considerably in recent years and has contributed to the growth of service exports. Albania also exports hydropower-based electricity, but its contribution to exports is relatively volatile, depending on hydrological conditions (Bank of Albania, 2020[68]). Albania ranks 92nd out of 129 economies on the economic complexity index, which measures the level of knowledge or capabilities embedded in an country’s export products (OEC, 2019[69]).10

Albania has attracted significant amounts of FDI, mostly for energy, extractives and non-tradeable services and less for manufacturing and ICT

Since 2007, Albania has attracted considerable FDI. At an average rate of 8.4% of GDP, annual net FDI inflows over the period have been among the strongest in the region (World Bank, 2020[1]). A significant part of the uptake in investment relates to two large energy projects 11 (35% of all FDI over the past five years), although over the past two years, FDI growth has also been sustained by small-scale investments. The remaining investments have predominantly been in the non-tradable sector, including financial services (9.5%) and real estate (6.5%). Meanwhile, most of the export-oriented FDI went to extractive industries (29%), while sectors like manufacturing and ICT received less than 5% of total FDI over the past five years (Bank of Albania, 2020[70]).

As part of wider efforts to streamline investment attraction and focus on strategic sectors, Albania created Free Economic Zones, which offer a variety of fiscal incentives and employment schemes for foreign investors.12 The zones also offer speedier issuing of licenses and permits and fast-tracking of other administrative procedures that are otherwise lengthy and burdensome (Albanian Investment Development Agency, 2020[71]). However, neither of the two approved zones (a so-called Technical and Economic Development area and an industrial park) are operational.

The skills gaps and skills mismatches affect productivity and growth

Albania struggles with relatively poor education outcomes and skills mismatches. The People section in this chapter discusses the education system and outcomes, particularly the low PISA scores and limited investment in the sector. More crucially from a prosperity perspective, nearly 40% of respondents to the 2019 Balkan Barometer survey noted that the skills that they acquired during their education did not meet the needs of their jobs. The most deficient skills included foreign language skills (42% of respondents), communication skills (24%) and other cognitive skills, including ability to learn on the job (27%) and creativity, innovation and risk taking (20%) (RCC, 2019[72]). Career education and better orientation programmes can help guide student choices at the end of upper secondary school based on their skills and potential and on market needs.13

Adult professional training can help address Albania’s skills gap but remains very limited. About 10% of adults participate in education, compared to 49% in the European Union (Figure 5.16). Many enterprises report that both technical and interpersonal skills are often lacking among applicants (World Bank, 2018[50]).

Figure 5.16. Adult participation in education and training is very low

Lack of skills also affects Albania’s underdeveloped innovation landscape. Public-sector research and development (R&D) expenditure remains low at less than 0.5% of GDP – lower than most regional peers and the EU average (2%) – and there is significant underutilisation of EU funds for innovation, even compared to other Western Balkan economies. Private-sector R&D expenditure is also low. Fewer than 10% of Albanian firms report having introduced a new product or service in the past year, compared to 25% to 50% of firms in the other Western Balkan economies. Fewer than 5% of Albanian firms report having introduced an innovative process, compared to 15% to 45% in other Western Balkan economies) (OECD et al., 2019[74]).

A skills strategy should aim to make the most of Albania’s digital potential. From a low in the 2000s, Internet usage is now the second highest in the region (Figure 5.17).

Figure 5.17. Albania must continue the impressive pace of increasing Internet use

The institutional and administrative constraints limit domestic and foreign investment

The poor business climate and the lack of transparency of business regulations affect investment and productivity growth in Albania. Although the economy undertook significant reforms to create a business environment more conducive to investment and growth, there remain considerable institutional and administrative obstacles. In particular, corruption, slow and unpredictable contract enforcement and difficulties obtaining construction permits negatively affect the quality of the business environment.

Corruption increases the cost of doing business in Albania

Corruption remains a considerable challenge in Albania and is a major constraint for businesses. The BEEPS points to the prevalence of petty corruption: the share of public transactions where a gift or informal payment was requested was 30% in Albania, compared to 13%, on average, for all economies in the survey. About 60% of survey participants in Albania noted that they had received at least one bribe payment request over the past year and that they felt that they were expected to bring gifts to meetings with tax officials, which as noted above, are much more frequent compared to other economies. 43% of surveyed entities identified corruption as a major constraint to business. The bribery value amounted to 30% of the transaction, on average (World Bank/EBRD/EIB, 2019[76]).

Evidence of higher-level corruption in public procurement or public-private partnership (PPP) contracts is mixed. Most of the recent infrastructure-related PPP projects were undertaken with unsolicited bids, which are more susceptible to corruption (IMF, 2018[77]). Yet, only 15% of firms in the BEEPS noted a need to make payments in order to secure government contracts, which is lower than the 24% average for all participating countries (World Bank/EBRD/EIB, 2019[76]).

Reducing corruption has been and should remain a significant priority for the government, as corruption at all levels undermines growth, largely by deterring private investment (see the Peace and institutions section in this chapter).

Contract enforcement is lengthy and political, and regulatory instability is relatively high

Judicial inefficiency and lengthy contract enforcement affect business conflict resolution, which slows down business activities. The overburdened court system, which has a large backlog of unresolved cases and lacks specialisation among judges and a dedicated commercial court, contributes to long and costly contract-enforcement procedures (see the Peace and institutions section in this chapter). On average, contract enforcement takes 525 days, compared to 120 days in global best performers, and costs 43% of the value of the claim (compared to 22% in OECD countries) (World Bank, 2020[78]).

The resulting uncertainty regarding the reliability and length of contract enforcement elevates the risk of investment in Albania and thus negatively affects productivity-enhancing capital generation. This is compounded by perceptions of high political instability and regulatory uncertainty (World Bank, 2019[79]).

Obtaining construction permits is lengthy and expensive

The procedures and costs of obtaining licenses and permits seem to be important obstacles to business. Construction permit procedures in particular require 19 different documents or steps and entail dealing with 10 different national or local government authorities. The procedure takes 324 days, on average, and costs more than twice the average in high-income OECD countries. Two municipal taxes (an infrastructure fee and an examination fee) account for a very large part of the cost. On the Doing Business assessment, Albania ranks 166th out of 191 economies on the indicator of obtaining construction permits (World Bank, 2020[78]).

The government recognises the importance of reducing the regulatory burden on businesses. A priority reform for the coming two years is the systematic assessment and elimination of unnecessary licenses and procedures and the simplification of other procedures in order to minimise the negative impact on businesses. Active efforts in digitalisation of public services will also help reduce bureaucratic red tape and improve the efficiency of the public administration (Republic of Albania Council of Ministers, 2019[33]).

Procedural issues are complicated by frequent disputes over property rights. This problem has deep historical roots dating back to Ottoman times, when an effectively feudal system limited land ownership to a very small group of people. It was subsequently compounded by conflicting ownership allocations of entirely state-owned land under the communist regime, subsequent privatisations, and ownership based on occupation. As a result, there is considerable uncertainty and frequent disputes over property ownership, which in light of the highly overburdened, inefficient and inadequately specialised court system, are difficult to resolve swiftly and adequately in a formal manner. This represents a significant deterrent to investment, particularly FDI. Most potential FDI investors only consider public properties for potential investment due to the high risk associated with ownership of private land (Albanian Investment Development Agency, 2020[71]).

The large infrastructure gap limits investment, particularly manufacturing FDI

Albania has a sizable transport infrastructure gap compared to most regional peers. Despite some important recent investments in the development of key transport corridors, the road transport network and connectivity with neighbouring economies are still not on par with regional peers, and rail transport is highly underdeveloped and underutilised. Albania ranks 120th out of 141 global economies on the World Economic Forum Global Competitiveness Index with respect to the quality of its transport infrastructure, lagging behind all other European countries (WEF, 2019[80]).14 Albania is one of few regional countries with a sizable coastline and ports on both the Adriatic and Ionian Seas. However, its key ports need rehabilitation to become more regionally relevant (EBRD, 2018[81]). In recent years, the government has undertaken considerable investments to upgrade infrastructure, mostly executed through PPPs, but as discussed in more detail in the Partnerships and financing section in this chapter, the implementation and risks associated with these liabilities may have negative fiscal implications for the country in the medium to long term (General Directorate of Taxation, 2020[82]).

Electricity supply remains a recognised constraint for businesses. Albanian firms frequently identify electricity supply as a top constraint to business. In 2019, 58.7% of firms experienced electrical outages, which is above the Western Balkan average of 48.9% (World Bank, 2019[79]). Based on latest and international comparable, data and transmission and distribution losses were 23.7% in 2014 [Figure 5.18]) The National Energy Strategy 2018-2030 and the Consolidated National Action Plan on Renewable Energy Resources 2019-2020 recognise and aim to address these challenges. Joining Albania’s transmission system operator with the ENTSO-E network in 2017 has helped improve the security of electricity supply (ESC Adriatic, 2017[83]). Encouragingly, the recent reforms since 2014 have led to further reductions in distribution and transmission losses (OST, 2021[84]; OSHEE, 2021[85]).

Albania is advancing in the liberalisation of its energy market thanks to the transposition and implementation of the Third Energy Package (Republic of Albania Council of Ministers, 2019[33]). Albania is the only Western Balkan economy to have completed the requirements to unbundle electricity and gas transmission system operators (Energy Community Secretariat, 2018[86]). New competition in the sector could result in a better quality of service and a more secure energy supply. It will be important complete this process in the national electricity sector distribution system.

Figure 5.18. Electric power transmission and distribution losses are increasingly problematic

Partnerships and financing – financing sustainable development

The Partnerships and Financing pillar of the 2030 Agenda for Sustainable Development cuts across all goals focusing on the mobilisation of resources needed to implement the agenda. It emphasises the efficient and effective use of these resources towards achieving the agenda goals.

Albania’s economy was recently hit by two major shocks. The November 2019 earthquake caused considerable infrastructural damage, and the ongoing COVID-19 pandemic has already significantly affected economic activity and will require considerable fiscal and other policy responses in the coming months to mitigate the effects.

In light of this increased fiscal burden and its impact on the already sizable public debt, fiscal policy will require careful, well-targeted and efficient public spending in the coming years in order to provide effective public services, finance needed investments and meet debt servicing costs. The Partnerships and financing section in this chapter covers the main fiscal policy and public finance obstacles Albania faces (Table 5.4).

Table 5.4. Partnerships and financing – three major constraints to an effective fiscal response to the 2019 earthquake and COVID-19 in Albania
1. The fiscal space is limited.
2. Revenue performance is lagging behind, while expenditures need to increase in key areas.
3. Access to financing is limited.

Remittances are an important source of finance in Albania

Albania ranks among Europe’s top countries in remittances as a share of GDP. Remittances amounted to around 9.4% of GDP and USD 1 455 billion in 2019. The share has progressively decreased since the transition, from 28% of GDP in 1993 to 14.48% in 2008. Despite their significant share in GDP in Albania and almost all regional economies, remittances are mainly used for household consumption and thus do not constitute an important lever for development (Figure 5.19).

Albania is developing and implementing a state diaspora policy to mobilise and leverage its human and financial resources abroad. Since November 2019, the Albanian Diaspora Business Chamber, an independent non-profit organisation, attracts and supports investors willing to establish or expand their businesses in Albania. The National Strategy for Diaspora 2021-2025, adopted in July 2020 by the Council of Ministers, aims to mobilise professionals abroad and to attract innovative investments from the diaspora.15 The banking sector will play a crucial role in channelling remittances towards economic sectors in need, and a co-ordinated action plan is under preparation.

Figure 5.19. Remittances play an important role in Albania’s economy

The fiscal space is limited

Albania avoided a major recession in the aftermath of the global financial crisis in large part due to the provision of a considerable fiscal stimulus. This led to a significant and rapid increase in the level of public debt, which rose from 57.7% of GDP in 2010 to 73.3% in 2016. The implementation of consolidation measures have reduced the public debt to 66.7% of GDP as of 2019. Based on estimates, the COVID-19 crisis could increase the public debt to 75,9.3% in 2020 (Figure 5.20), implying significantly reduced fiscal space.

With low domestic savings (9% of GDP as of 2019) and lacking diversified domestic funding sources outside the banking sector, Albania relies strongly on foreign financing sources (World Bank, 2020[1]). Foreign debt, mostly denominated in euros, currently represents 45% of total debt. This exposes Albania to risks related to financing conditions in the Eurozone and to exchange rate-related risks. The exchange rate risks are mitigated by sizable euro reserves, but the increased volatility and depreciation of the lek in relation to the euro since the onset of the COVID-19 crisis, and the uncertainty regarding exchange rate movements as the crisis unfolds, could elevate these risks.

Figure 5.20. Public debt is under significant upward pressure from COVID-19

Risk-to-debt sustainability also concerns public-sector contingent liabilities related to infrastructure PPPs. In recent years, the government has undertaken significant new infrastructure investments, most of which are being implemented as PPPs. Many of these (amounting to about 45% of GDP in total) were based on unsolicited bids and lacked proper risk assessments. In the absence of an adequate centralised monitoring framework for PPPs to ensure timely intervention on underperforming projects, there are significant risks that the contingent liabilities associated with this large number of PPPs may be realised, which can threaten the sustainability of government debt (IMF, 2018[77]).

The performance of the energy sector also implies fiscal risks. When hydrological conditions are not good and the electricity sector relies on relatively expensive electricity imports, the additional costs are borne by state-owned enterprises in the sector, with important fiscal implications. Without significant reforms, including among others, electricity pricing that reflects costs, the sector will remain a source of fiscal risk (IMF, 2018[77]).

Revenue performance is lagging behind, and expenditures need to increase in key areas

Improved tax collection and a broader tax base are needed to improve revenue performance

Thanks to good economic performance, tax revenues have been steadily growing in recent years, with further room for widening the tax base. Albania’s tax-to-GDP ratio was 21.6% in 2018, with taxes on goods and services the most important contributor (Figure 5.21). Most regional countries achieve higher revenues, despite having lower tax and contribution rates, particularly for labour. This points to underlying challenges in the tax system, including the efficiency of tax collection, a need to widen the tax base and the presence of informality and tax avoidance. Tax rates are seen as the biggest obstacle to doing business in Albania, with 50% of surveyed firms noting this as a major constraint (World Bank/EBRD/EIB, 2019[76]).

Figure 5.21. Albania’s tax system requires improvement

The introduction in recent years of various economy-wide or sector-specific tax incentives or tax cuts has reduced potential revenues and complicated the tax regime, creating loopholes for tax avoidance. For example, four- and five-star hotels can be exempt from corporate income tax payments for ten years under certain conditions, and tax rates have been cut from 15% to 5% for entities operating in the IT sector (Invest in SEE, 2020[90]). Many of these interventions come without detailed assessment of the relative gains compared to their fiscal costs, which is especially problematic given Albania’s limited fiscal space and high expenditure needs (IMF, 2019[91]).

The government invests in compliance and widening of the tax base, but trust and informality pose tough challenges. The government continues to implement measures to expand the tax base, mainly through better compliance enforcement (European Commission, 2020[12]). However, persistent government debt arrears, value added tax (VAT) refund delays and frequently changing tax regulations create uncertainty for businesses and can undermine trust in government and encourage operation in the grey economy (IMF, 2018[77]). As discussed, informality also reflects lack of trust in institutions, dissatisfaction with public services provision, low ethics of tax payment and other factors that require a wider and longer-term reform effort (ILO, 2011[92]).

The administrative burden of paying taxes is an important obstacle identified by 29% of firms in the BEEPS (World Bank/EBRD/EIB, 2019[76]). Annual tax filing requires 35 procedures and takes, on average, 252 days per year, compared to 3 procedures and 49 days in the global best performers (World Bank, 2020[78]). Some 92% of respondents noted the need to meet with tax officials, compared to 54% for all economies participating in the survey.16 Moreover, on average, they had to meet five to six times, compared to two to three times for all other economies (World Bank/EBRD/EIB, 2019[76]).

Albania has invested significant effort in building its taxation capacity, and the efforts should continue. Much has been done in recent years to improve the efficiency of tax administration, build the capacity of the tax authority, set up databases and reduce corruption. Further efforts should aim to improve the overall skills and capacities of the tax administration and the profiling and risk assessment of taxpayers, and to speed up reforms enabling entirely electronic filing (IMF, 2019[91]).

Access to financing is constrained by weak property rights and informality

Albania’s financial sector is stable, liquid and well capitalised; however, lending to the private sector has declined considerably as a share of GDP in recent years. Between 2010 and 2019, private-sector credit fell from 39.1% to 33% of GDP (Figure 5.22) largely due to the feeble growth in lending to enterprises. The trend is occurring despite the strong and growing deposit base (67% of GDP, which is considerably larger than in regional peers) and despite the decline in lending interest rates (from 9.7% in 2014 to 5.9% in 2019) (IMF, 2020[64]).

Figure 5.22. Bank lending is constrained, especially for enterprises

Unclear property rights, widespread informality, weak financial literacy and the high share of NPLs are key constraints to bank lending and access to financing. Illegally constructed buildings, not-yet legalised buildings and un-documented or unregistered property prevent property owners and business from using property as collateral thereby constraining bank lending. Considering the size of the informal economy (about 30% of GDP [ (Kelmanson et al., 2019[93])]), banks tend to be additionally risk averse. Low risk tolerance also reflects the share of NPLs, which remains relatively high (11.1% in 2018) (World Bank, 2020[1]). Assessment of credit worthiness is compounded by the lack of a private credit bureau and the limited coverage of the public credit registry (56% of all adults) (World Bank, 2020[78]). The supply of financing is also constrained by the underdeveloped non-bank financing sector, which is especially problematic for start-ups or high-risk innovative investments. The unfolding COVID-19 economic crisis will likely put additional strain on bank lending. Albania’s 2020-22 ERP acknowledges access to financing as an important obstacle to business development, particularly for SMEs. While there are various support schemes to improve SMEs’ access to financing, information about them reaches a limited number. Increasing the use of the centralised information platform to improve access to financing is one measure proposed in the ERP (European Commission, 2020[41]).

Peace and institutions – strengthening governance

The Peace and Institutions pillar of the 2030 Agenda for Sustainable Development encompasses peace, stability and accountability, as well as effective governance and the performance of the public sector more broadly.

Since 1991, Albania has taken remarkable steps to transition from an autarchic to a market economy and from a repressive regime to a fully-fledged democracy. In the past 20 years, the country held elections on a regular basis, and the political landscape is much less fragmented and unstable today than ten years ago. Albania has become safer, and homicide rates have decreased, from 43 per 100 000 inhabitants in 1997 to 2 per 100 000 inhabitants in 2018. Recent ambitious reforms of the judicial system lay the foundation for more reliable, efficient and independent courts. Tightening for fight against corruption has increased the powers and tools to combat one of the country's most deeply rooted constraints to development. Significant efforts have been made to improve the security of property rights, a problem in many post-communist regimes in the region. The subnational government structure has been rationalised and decentralisation reforms initiated. A modern Competition Authority is well placed to guarantee a quality business environment.

Integration process with the European Union is a strategic priority and has been a driver of institutional development, even where implementation remains challenging. Most Albanians view access to the European Union as an important milestone. The process has been an important driver of reforms and institution building and has provided the country with large financial and technical support for its development and regional integration, as well as market access and economic opportunity (Box 3.3). As part of the process, Albania is striving to bring its legislation and institutional organisation in line with the existing body of EU laws and standards (known as the acquis), helping set the basis for effective institutions and processes. However, implementation of such transcriptions is often challenging (European Commission, 2020[94]).

Frequent election boycotts have hampered representation and institutional development. Opposition parties boycotted national and local elections seven times between 1992 and 2019, partly crippling the capacity of assemblies to guarantee independent oversight of the other state powers. Frequently boycotted national and municipal assemblies cannot represent the entire population, effectively alienating large shares of citizens from the decision-making process: indeed, voter turnout for parliamentary elections fell from 90% in 1992 to 47% in 2017.

Parallel informal institutions remain relevant, solving some problems but creating challenges for development. Closely-knit kinship networks based on traditional norms and customs still regulate relationships between parties in some parts of the country. For instance, village elders in rural areas are a faster, more efficient way to settle land disputes than tribunals. While such solutions can guarantee social peace and help get things done, they can contribute to the dysfunction of formal institutions. Courts cannot keep track of land transactions that occurred on the basis of traditional rules and customs, and cadastral offices often end up with outdated maps and property registers. Still today, formal plot transactions between parties are not the clear and sole owners can easily be contested. Unclear property rights discourage the emergence of functioning real estate and land markets and, consequently, investments (see the Prosperity section and the Partnerships and financing section in this chapter) and undermine the fiscal capacity of municipalities.

Strengthening formal institutions is essential to isolating the decision-making process from interference by special interests. In the past, political patronage has played a role in public hiring and has contributed to the fragmentation of the state apparatus. However, recent reforms have promoted professionalism in the public administration, and some subordinated bodies have been reorganised. Steps have been taken to streamline and co-ordinate the planning process, but their implementation requires time. Last, improving statistical capacity will be key to ensuring that decisions are increasingly based on empirical evidence.

The Peace and institutions section in this chapter identifies six major constraints to the development of solid institutions in Albania, drawing on interviews and a workshop conducted as part of this initial assessment. The country needs to build on its achievements in order to overcome obstacles, including the fragmented structure of the administration, which can stand in the way of implementation; courts’ lack of capacity and independence; unsecure property rights; corruption and patronage in the public administration; incomplete decentralisation and regional disparities; and limited statistical capacity, especially in the area of planning and reporting on economic indicators (Table 5.5).

Table 5.5. Peace and institutions – six major constraints to more effective public institutions and services in Albania
1. The fragmented structure of the public administration can stand in the way of implementation.
2. Courts lack capacity and are exposed to external influence.
3. Land property rights remain complex, affecting land productivity and sustainability.
4. Corruption remains a challenge.
5. Limited local fiscal and administrative capacity and an unclear regional development framework may exacerbate regional inequalities.
6. Statistical capacity is limited, especially in the area of planning and reporting on economic indicators.

The fragmented structure of the public administration can stand in the way of implementation

Albania has numerous and sometimes overlapping strategic documents

Currently, Albania has 47 sectoral and cross-sectoral strategies and 33 strategic policy documents, action plans and master plans. In principle, line ministries and subordinate institutions draft their own strategic documents in line with the national priorities set out in the NSDI II. The OPM ensures that all these documents are aligned with the NSDI II. The new Integrated Planning System is supposed to improve the quality of strategies and their consistency with the NSDI II, their link with budget planning and public finance management, and their monitoring.

The OPM is striving to harmonise all strategic documents and to align them with the NSDI II. This is a challenge. There are numerous strategic documents outlining objectives that are contradictory or hard to monitor.17 Some plans are used by their proponents to carry out their own priorities, rather than align with a common agenda. Others may amend long-term objectives approved during previous legislatures in response to changing political guidelines. The government must also factor in expectations set by international donors, which might be contradictory and add complexity to the planning process. The OPM aims to step up its co-ordination capacity, establish a hierarchy among strategic documents and enhance monitoring capacity (European Commission, 2020[94]; OECD/SIGMA, 2019[95]).

The fragmentation of agencies poses a challenge to implementation capacity

Since the end of the 1990s, responsibility for policy implementation has been gradually transferred from ministries to subordinated authorities and agencies. The rationale for deconcentrating executive power (also known as agencification) is the supposed capacity of these bodies to regulate, inspect and provide services and public goods more effectively, efficiently and, independently from political pressure. Agencies and authorities are usually detached from ministries, enjoy financial and managerial independence, and operate according to business-like principles.

The deconcentration process has yielded efficient and independent institutions but has suffered from the influence of special interests. The Competition Authority stands out as an efficient and independent institution (European Commission, 2020[94]) and a positive example of the agencification drive. Yet, the fragmentation of the political landscape translated into a problematic system. Between 1997 and 2013, small parties multiplied, usually to support the two traditional parties (Partia Demokratike and Partia Socialiste e Shqipërisë) in large coalitions.18 These parties had narrow electoral bases and limited possibilities to seize a seat in the national assembly. However, in a fragmented political scenario, their contribution was decisive for the coalition's victory and was usually rewarded with a role in the executive, for example with a position in agencies (Mendelski, 2019[96]). These bodies then became vehicles to pursue special interests rather than autonomous branches guaranteeing unbiased and effective implementation of public policies.19 Moreover, they created steering and co-ordination issues and a larger financial burden for the state budget (OECD/SIGMA, 2019[95]).

Today, Albania has a very high number of agencies and other bodies with sometimes unclear tasks. There are around 190 bodies that are directly accountable to the OPM or various ministries, and several other independent authorities that are accountable to the national assembly (such as the Competition Authority and the Albanian Water Regulatory Authority). Subordinated institutions are the most fragmented: around 100 of them operate under the Law “On civil servants” and are divided into six categories: policy makers, regulators, law enforcers, service providers, inspectorate and trainers (according to data provided by the Department of Public Administration).20 The rest do not, complicating their categorisation and therefore the definition of their role and type of governance (Table 5.6). The decreasing fragmentation of the political landscape over the years offers an opportunity to reduce the number of agencies and authorities.21

Table 5.6. Albania has a very high number of subordinated bodies
Inventory of subordinated institutions as of May 2020
Ministry to which bodies are accountable	Subordinated institutions under the Law “On civil servants”		Subordinated institutions not under the Law “On civil servants”
Ministry to which bodies are accountable	Number of institutions	Number of employees (civil servants)	Number of institutions	Number of employees (not civil servants)
Health and Social Protection	6	1 071	9	3 200
Finance and Economy	19	3 980	3	1 355
Tourism and Environment	5	734
Office of the Prime Minister	16	707	11	2 546
Internal Affairs	13	456	8	1 822
Agriculture and Rural Development	19	1 416	4	350
Defence	2	201	5	313
Education, Sports and Youth	3	92	10	684
Infrastructure and Energy	13	599	4	397
Justice	7	269	3	308
Culture			29	921
Total	103	9 525	86	11 896
Note: Table does not include figures for civil servants employed in the police and prison system (around 11 000 and 4 500 civil servants, respectively) or staff in ministries (around 2 100). As an example, the State Health Inspectorate (Inspektoriati Shtetëror Shëndetësor) in the Ministry of Health and Social Protection is considered a subordinated institutions operating under the Law “On civil servants”, while hospitals are not.
Source: Authors’ elaboration based on data provided by the Department of Public Administration.

Simplification of the number of agencies and authorities is ongoing but with some limitations. The 2019 Law “On cadastre” established a new State Cadastre Agency that takes over the responsibilities of three previous subordinated bodies: the Immovable Property Registration Office, the Agency of Inventory and Transfer of Public Properties and the Agency for the Legalization and Urbanization of Informal Areas. Moreover, the government is working towards a major reorganisation of subordinated bodies that would simplify their classification and redefine their governance, their degree of operational and administrative autonomy and the applicable supervision and control measures. However, as of May 2020, only six ministries have partly or entirely reorganised their subordinated bodies. Moreover, the restructuring agenda leaves some issues unaddressed. For example, there is still no central guidance on planning and reporting on the performance of these bodies and their boards of directors (OECD/SIGMA, 2019[95]).

The courts are short of capacity and still exposed to unlawful external influence

The judiciary in Albania has long been considered biased, poorly accessible and sometimes inefficient. Civil and criminal justice in Albania is more exposed to the improper influence of the executive power and to corruption than OECD countries (Figure 5.23). Civil justice is neither accessible nor affordable: according to the World Justice Project, 40% of citizens face obstacles while seeking legal assistance. Partiality and inefficiency have undermined people’s confidence in the judiciary: according to Gallup data, only 31% of Albanians trust courts, while only 17% believe that judges resolve cases according to the law, which is the lowest share in the region (OECD, 2020[97]).22 On the positive side, the disposition time for litigious civil and commercial cases is the lowest in the region (159 days). The number of days to resolve civil, commercial and administrative cases has decreased since 2012 (OECD, 2020[97]). Yet, according to the latest Doing Business indicators, some business leaders complain that court fees for commercial cases are high, resolving labour litigation takes over five years and concluding bankruptcy procedures takes two years (at the end of which shareholders recover only 44% of the value of their shares).

Figure 5.23. Civil and criminal justice is more exposed to the improper influence of the executive power and to corruption than in other countries with a similar GDP per capita

To restore efficiency and trust in courts, Albania has profoundly reshuffled its judiciary institutions.

First, the country embarked in a drastic but slow process of vetting members of the judiciary. Since 2016, the Independent Qualification Commission (KPK) – a constitutional body – has been screening the assets, background and proficiency of the 811 judges and prosecutors. An international team of career judges and prosecutors provides support. Between February 2018 and July 2020, the KPK vetted 275 judges and prosecutors; 102 have been dismissed, and 59 resigned before the final verdict. At the current pace (nine judges vetted per month), the KPK’s appraisal would end in 2025 (instead of 2022, as expected).23 At the same time, the Albanian School of Magistrates may have insufficient capacity to resupply the judicial system with qualified jurists.

The vetting process will be beneficial in the long run, but it undermines the capacity of tribunals in the short to medium term. Dismissals and resignations have left some courts dysfunctional. For instance, the Supreme Court has 4 operative judges instead of the 19 envisaged in the constitution and is overburdened: the number of backlogged cases increased from 22 000 in 2017 to 28 863 in 2018 and about 31 000 in 2019. At this pace, the Supreme Court would need an estimated 17.25 years to process all pending files.24

Second, the judiciary now has governing bodies that are, in principle, impermeable to clientelistic and informal networks. Law No. 115/2016 “On governance institutions of the judiciary system” established four new institutions: the High Judicial Council (KLGj), the High Prosecutorial Council (KLP), the High Justice Inspector and the Justice Appointments Council (JAC). The KLGj and the KLP deal with the selection, promotion and dismissal of judges and prosecutors. The High Justice Inspector investigates disciplinary misconduct and initiates disciplinary proceedings against judges and prosecutors at all levels. The JAC screens and evaluates candidates for the Constitutional Court and the High Justice Inspector based on professional and moral criteria. Members of all these institutions are either peer judges and prosecutors or lay members elected from among the country’s law experts (lawyers, law professors and representatives of civil society). Representatives from the executive or the legislative powers no longer sit on their boards.25

The politicisation of the judiciary, however, is deeply rooted in the initial reforms of 1992 to 1996. Following the collapse of the communist regime, the new ruling elite replaced the then-judges with personnel educated through a short three- to six-month course. Participants were often hand-picked from among party militants, enabling the infiltration of political interests into the highest echelons of the judiciary. Subsequent presidential nominees consolidated a system of party patronage (Bertelsmann Stiftung, 2018[99]). The ongoing vetting process and the introduction of new governing bodies of the judiciary will help curb the influence of the politically appointed judges still in the system.

The KLGj is stepping up the capacity of the Supreme Court. Between February and July 2020, it filled 11 new vacancies and is expected to fill the remaining 3 to complete the court. Together with the United States Agency for International Development, the council will provide the Supreme Court with more human resources to reduce the arrears and will introduce IT to make procedures more modern and transparent.

The councils and the Albanian School of Magistrates are putting in place measures to strengthen the long-term capacity of the rest of the judiciary. The KLGj and the KLP are transferring judges and prosecutors to fill vacancies across the country; promoting judges in appellate courts, the Supreme Court and special courts against corruption and organised crime; and screening all recent Albanian School of Magistrates graduates who are ready to be appointed. The Albanian School of Magistrates, in co-operation with the councils, increased the number of candidates attending initial training in 2020.

Property rights are still insecure, affecting land productivity and sustainability

Land rights in Albania remain insecure

Property rights to land are frequently in dispute in Albania. Incomplete cadastral registries fuel disputes over unclear land boundaries, overlapping plots and road access. These disputes are rarely brought to court, where proceedings can be lengthy, expensive and subject to corruption. Rather, they are settled informally through mediation by relatives, village elders or local leaders and are usually based on traditional norms and customs (USAID, 2016[100]). Disputes may involve parties that are both legitimate owners of the same land plot as a result of contradictory legislation (see below). In 2011, this type of dispute constituted about half the cases in civil courts (USAID, 2016[100]). Some have been brought before the European Court of Human Rights, and their settlement was often costly to the state.26

Unsecure property rights have delayed the emergence of a functioning land market. In 2007, fewer than 2% of rural households had sold land on the formal market since the beginning of privatisation, and only 3.6% had rented their land. In 2010, 36 000 land transactions involving 830 ha of agricultural land (out of 1 201 300 ha of total agricultural land) were concluded (Cela et al., 2018[101]). In spite of the low number of formal land transactions, average farm size has increased over the past years, indicating that landowners are active in informal markets. Parties might opt not to register transactions if they are unaware of the regulations and their rights, mistrust property registries or do not take formal property rights at face value.

Land consolidation is lagging behind, and landholdings remain small and fragmented, affecting agricultural productivity. As of 2011, there were about 390 000 family farms, with an average size of 1.26 ha divided into 4.7 parcels and with an average parcel size of 0.27 ha.27 Small farms may have insufficient resources and capacities to mechanise or to experiment with new methods to improve productivity and environmental sustainability. Moreover, the piecemeal management of small parcels has caused soil erosion and degradation. The dysfunctional land market and the lack of consolidation policies exacerbate the fragmentation issue.

Incomplete land titling undermines local fiscal capacity. Since land registries are often incomplete, officers cannot collect property taxes, a main source of own revenues at the subnational level. Indeed, the share of income from property taxes in overall subnational revenues is the lowest in the region (0.3% and 1.7%, respectively) (Figure 5.24).

Path-dependent and incomplete legislative frameworks leave land-related issues unresolved

The land issue in Albania has deep historical roots. In 1912, the newly established state of Albania inherited the Ottoman feudal system, characterised by few landowners controlling large plots. Having resisted attempts in the 1920s and 1930s to redistribute land, the system gradually crumbled under communist rule. The regime first nationalised forests and pastures in 1945, then collectivised agricultural land and formed large co-operatives and state farms and finally abolished private ownership altogether in 1976. When the regime fell 14 years later, restoring property rights became a top national priority in order to realise the transition to a market economy. Land reform in particular was seen as a way to empower the rural population, which was afflicted by poverty and hunger.

Table 5.7. Main legislation defining the regulatory frameworks on land management in Albania
Law	Main provision
Land distribution to new landowners
Law No. 7501/1991 “On land”	Distribution of land rights (ownership and usage) to members and employees of dissolved co-operatives and state farms through ad hoc village commissions. Rights must be registered at the local Office of Immovable Property Registration.
Law No. 7652/1991	Granting urban families ownership of the apartments and houses they occupy.
Law No. 8053/1995 “On the ownership transfer without remuneration of agricultural land”	Conversion of usage rights to ownership rights in line with Law No. 7501/1991 “On land”.
Law No. 9948/2008 “On the review of legal validity for the creation of ownership titles on agricultural Land"	Streamlining of criteria defining the validity of titles, as defined by Law No. 7501/1991 “On land” and Law No. 8053/1995 “On the ownership transfer without remuneration of agricultural land”.
Law No. 171/2014 “On the completion of legal procedures for the transfer of agricultural land of former agricultural enterprises in ownership of the beneficiaries”	Transference of ownership of agricultural land from former agricultural enterprises (the state) to beneficiaries who fulfil criteria of its possession and use but who do not yet own it.
Law No. 111/2018 “On cadastre”	Creation of the State Cadastre Agency, which replaces the Immovable Property Registration Office, the Agency for the Legalization and Urbanization of Informal Areas and the Agency of Inventory and Transfer of Public Properties.
Law No. 20/2020 “On the treatment of property and finalization of the property compensation process”	Provision of effective legal instruments for resolving remaining problems related to property rights on immovable properties and to registration issues.
Restitution and compensation to former owners
The Law No. 7698/1993 “On restitution to and compensation of former owners”	Commencement of the process of restitution and compensation to original land owners expropriated during the communist regime.
Law No. 133/2015 “On the treatment of property and finalization of the property compensation process”	Establishment of the Agency for Property Treatment in charge of finalising the recognition and compensation process. The law repealed Law No. 7698/1993 “On restitution to and compensation of former owners” and Law No. 9235/2004 “On restitution and compensation of property”.
Source: Authors’ own work based on Venice Commission (2019[102]), Albania – Opinion on the draft law on the finalisation of transitional ownership processes, adopted by the Venice Commission at its 120th Plenary session, Venice, 11-12 October 2019, www.venice.coe.int/webforms/documents/?pdf=CDL-AD(2019)023-e.

Land redistribution commenced in 1991 and did not immediately consider compensating original owners for land expropriated by the communist regime. Under the guidelines of Law No. 7501/1991 “On land” ad hoc village-level commissions distributed ownership and usage titles to members and employees of the dissolved co-operatives and state farms. These certificates had to then be registered in the national cadastre, thus linking the acquired titles to a centralised map of parcels. Implementation of the law, however, was imperfect. Landowners who could not register their certificates due to cadastral maps and distrust of the cadastral offices ended up holding essentially illegal titles (Venice Commission, 2019[102]). Commissions in about half the villages defied the law and distributed plots according to pre-1945 boundaries. Law No. 7698/1993 “On restitution to and compensation of former owners” disrupted the redistribution process and recognised all former ownership of agricultural land that had been nationalised, expropriated or confiscated. By then, however, 700 000 ha of collective and state farmland had already been redistributed to nearly 500 000 family farms (Hartvigsen, 2013[103]).

Since the 1990s, concomitant but separate frameworks have regulated land ownership and the right to compensation, although the two issues are necessarily intertwined (Table 5.7). A 2015 law tried to settle the issue of restitution and compensation, but implementation seems to have been largely defective. For example, two different agencies carry out title registration and the finalisation of restitution (Venice Commission, 2019[102]).

Corruption remains a challenge

Corruption is still perceived as a serious problem in the country. According to the World Bank Enterprise Survey, 43% of firms identified corruption as a major constraint, with the bribery value amounting to 30% of the transaction, on average. Both the incidence and depth of bribery in Albania are the highest among Western Balkan economies. Gifts are usually given to tax officials during inspections or to public officials more generally in order to get things done (Table 5.8). Corruption undermines public services provision. University of Tirana students may be obliged to give gifts in exchange for grades or to purchase their professors’ textbooks (Youth Council of the U.S. Embassy in Albania, 2017[104]). Some 68% of respondents in a recent survey reported having bribed doctors or nurses to get treatment in public hospitals (Krasniqi et al., 2019[105]). Corruption may also take the form of vote buying, obscure party financing and patronage in the public administration.

Table 5.8. Gift-giving and bribery are widespread in Albania compared to other Western Balkan economies
Objects of bribery (% of firms giving bribes)
	Albania	Bosnia and Herzegovina	Kosovo	Montenegro	North Macedonia	Serbia	OECD
Tax officials	34.6	14.4	1.8	22.8	3.7	1.2	0.1
Government contract	15.3	8.2	0.9	7	16.8	3.1	6.3
Operating license	8.9	12.7	1.1	20.7	0.7	17.8	3.5
Import license	16.3	1.6	0.9	18.7	7.9	4.5	0
Construction permit	16.8	11.7	6.8	19.5	8	16.7	0.1
Electrical connection	16.8	5.5	10.8	12.6	9.7	8.8	0
Water connection	9.8	1.2	0	0	1.3	0	0
Get things done	31.6	10.6	6.5	17.1	4.3	7.8	2.8
Note: Firm-level survey of a representative sample of an economy’s private sector (manufacturing firms only).
Source: WB/EBRD/EIB/EC (2021[106]), Enterprise Surveys (database), https://www.enterprisesurveys.org/en/enterprisesurveys.

Albania has taken steps to fight corruption, but more coherence and co-ordination is required

Anti-corruption efforts in Albania are organised through a network of ministries, departments and institutions that prevent, investigate and prosecute cases (Table 5.9). Seven institutions have preventive mandates, which sometimes overlap. The National Coordinator for Anti-Corruption (NCAC), led by the Ministry of Justice, co-ordinates and oversees the implementation of the anti-corruption strategy through focal points in all relevant ministries and institutions. The Anti-Corruption Task Force (ATF) comprises five institutions and directorates inspecting civil servants’ operations, dismissing those involved in misdemeanours and referring criminal cases to prosecution. The High Inspectorate of Declaration and Audit of Assets and Conflict of Interests collects public officials’ assets declarations, and the State Supreme Audit Institution oversees public tendering. Concerning law enforcement, a new Special Anti-Corruption and Organised Crime Structure investigates criminal corruption and organised crime through a Special Prosecutor’s Office and the National Bureau of Investigation. Dossiers are then transferred to a specialised court (first instance and appeal Courts for Serious Crimes) for trial.

Table 5.9. Key actors tackling corruption in Albania
Mandate	Institution in charge
Prevention	National Coordination for Anti-Corruption Anti-Corruption Task Force: Central Inspectorate (Inspektoratin qendror) Council of Ministers Unit for Transparency and Anti-Corruptionn (Njësinë e transparencës dhe Antikorrupsionit në Kryeministri) Public Procurement Agency High Inspectorate of Declaration and Audit of Assets and Conflict of Interests State Supreme Audit Institution
Law enforcement (investigation and prosecution)	Special Anti-Corruption and Organised Crime Structure (Speciale për Korrupsion dhe Krim të Organizuar – SPAK): Special Prosecutor’s Office National Bureau of Investigation (Byroja Kombëtare e Hetimit) General Directorate of the State Police, Ministry of Internal Affairs (Policia e Shtetit) General Directorate for the Prevention of Money Laundering within the Ministry of Finance and Economy
Specialised courts	Court for Serious Crimes (Gjykata e Krimeve të Rënda)
Source: Authors’ work based on interviews with the Ministry of Justice.

Reforms of the anti-corruption framework have produced concrete results, but implementation capacity has yet to improve. In 2019, 2 257 corruption cases were referred for prosecution (2 126 in 2018), and 643 corruption case were sent to court (513 in 2018). Between 2018 and 2019, 192 high-level state officials were prosecuted, 12 people were indicted, and 535 middle- and lower-ranking officials were convicted (European Commission, 2020[107]). Albania may need to streamline the current anti-corruption framework to consolidate its fight against bribery and gift giving. The NCAC and the ATF have partially overlapping mandates, and neither enjoy political or financial autonomy, which undermines their authority and their capacity to co-ordinate and to lead the anti-corruption effort.28

Vote buying, obscure party financing and patronage in the public administration are other forms of corruption

Vote buying and improper external influence damage the democratic process. According to a recent survey, 21% of Albanians have been offered money or a favour in exchange for a vote in national or local elections (Popovikj, Gjuzelov and Bliznakovski, 2019[108]).29 Party financing is also likely to steer the outcome of elections by putting parties on an unequal footing during electoral campaigns. Organised crime groups with political ties seem to have influenced the voting process in past legislative elections. The existence of such allegations demonstrates the system’s susceptibility to illegal conduct and thus the need for corruption-proof electoral reform. The Central Election Commission, a permanent agency responsible for managing parliamentary and local elections needs more autonomy and capacity to monitor donations to parties and campaign spending.

Albania has long struggled with political patronage, but recent reforms of the public administration have improved the professionalism of public officials. Fierce ideological conflict accompanied the transition to democracy in the 1990s and facilitated winner-takes-all forms of governance. Changes of government often entailed reshuffling the public administration, dismissing (especially senior) civil servants considered closed to opposition parties and hiring more like-minded civil servants (BTI, 2020[109]; Elbasani, 2008[110]). The high turnover wore out the public administration’s collective knowledge and created conditions for continuous changes to the legislative framework and inconsistencies and contradictions. Recent reforms have started breaking this vicious circle. Recruitment has become fairer and more transparent thanks in part to the introduction of a fully digitalised recruitment and selection process for civil service. However, proper and full implementation has yet to be ensured, especially at the local level (European Commission, 2020[94]).

The limited local fiscal and administrative capacity and the unclear regional development framework may exacerbate regional inequalities

Regional development in Albania is unequal, and human and capital resources are concentrated in few areas. Albania has 12 qarku and 61 municipalities (bashkite).30 Half the population lives in 9 municipalities and 3 qarku. Fier, Gjirokastër and Tirana together account for one-third of the country’s GDP. There are also large regional inequities in access to social security and health insurance: coverage is up to five times higher in the Tirana metropolitan area than in other regions (see the People section in this chapter).

Historical and modern approaches to regional development can explain today’s territorial imbalances. Between 1945 and 1991, the communist regime tightly controlled the distribution of capital and human resources across the country: it regulated production activities in each municipality, restricted internal migration and established collective and state farms to fulfil autarchic ambitions. The dissolution of co-operatives in 1991 left rural households with few economic opportunities and forced migration abroad or towards cities. Peripheral areas gradually emptied.31 The decentralisation process accelerated in 2013, and important reforms were implemented in 2014 and 2015.

Today, a regional development agenda exists but is treated separately from the ongoing decentralisation process. This risks undermining the inclusivity of regional development plans (designed at the central level) and their feasibility, since they do not take into account the municipalities’ administrative, political and fiscal implementation capacity.

The decentralisation process is ongoing, but local fiscal and administrative capacities remain limited

The National Crosscutting Strategy for Decentralization and Local Governance 2015-2020 guides reforms of the power of local authorities and their relationship with the state. The strategy is part of the framework of public administration reform, together with strategies for anti-corruption, digitalisation and public finance management. Other milestone documents regulating the decentralisation process include Law No. 115/2014 “On administrative-territorial division of local government units in the Republic of Albania” (approved in 2014); the new Law No. 139/2015 “On local self-governance” (approved in 2015); and the new Law No. 68/2017 “On local government finance” (approved in 2017).

In the attempt to narrow territorial inequalities, municipalities have been granted more autonomy and power to provide goods and services.32 In 2013, the number of municipalities was reduced from more than 300 to 61 to create economies of scale and optimise service delivery. Municipalities have taken on more responsibilities.33 Since 2013, overall subnational expenditure has slightly increased to 16% of total public expenditure, lower than the OECD average (39%) but in line with the rest of the region. Capital spending has risen at the expense of current expenditure (from 24.3% of total subnational expenditure in 2013 to 27% in 2016) and mostly targets the construction and rehabilitation of local roads and public spaces, as well as sewers and water distribution (OECD/UCLG, 2019[111]). Current expenditure is one of the lowest in the region both in shares (73% of subnational spending) and per capita (USD 387 per person) and is mostly directed towards social spending and staff compensation (30% and 25%, respectively).

Figure 5.24. Own tax revenues are very low compared to the rest of the region and OECD standards

Local fiscal capacity remains limited, and the allocation of central transfers needs improvement. Own tax revenues amount to 16% of total subnational revenues, compared to 35% in the rest of the Western Balkans. Grants and subsidies represent up to 76%, compared to 44% in the region (Figure 5.24). Most of these transfers are block grants distributed based on demographic parameters that are likely outdated. The number of residents, for instance, is based on 2011 census data and civil registration offices, which might not factor in migration flows within the country and abroad. The current system of resource redistribution may therefore underestimate local service users and exacerbate rather than reduce territorial inequalities (AAM/HSS, 2019[112]). High-frequency demographic data collection could help fine-tune the system. There are also conditional transfers that reward local governments submitting quality projects; yet, distribution seems guided by political criteria rather than merit (Merkaj, Zhllima and Imami, 2017[113]), and disbursement is sometimes hampered by lack of local implementation capacity.

The action plan of the crosscutting strategy seeks to enhance the capacity of local governments. In particular, upcoming reforms will expand the adoption of ICT and the provision of integrated administrative services in all municipalities (Box 5.1), strengthen the dialogue between central and local governments and foster mutual accountability practices. Quality local governance is another strategic goal. Policies will aim to increase transparency and accountability, expand e-governance and strengthen community structures at the local level. Strengthening of EU Integration Network Units across all municipalities will foster the process of integration of subnational governments into the European Union.

Box 5.1. The 2020 digital revolution of public services in Albania

Public service provision in Albania is undergoing a radical transformation. Authorities have been putting an increasing number of services on line. e-Albania acts as a digital one-stop shop, allowing citizens to access more than 750 e-services any time. For each online application, citizens are assigned a unique identifier through which they can interact with the administration by providing documents and can track the status of their request. The portal facilitates interaction among state institutions, which through the exchange of relevant documents, reduces the burden of administrative procedures on citizens and enterprises. The system also accelerates the exchange of documents, which are increasingly certified by the digital signature of the applicant or of the civil servants involved.

The capacity of the public administration has been improving to absorb this ICT innovation. Some 2 000 civic employees have been trained to help citizens access e-Albania services. Some parts of the administration have rationalised and digitalised internal processes, cutting red tape. On average, citizens and businesses have to provide fewer documents per application than before.

The digitisation of public services has led to significant savings and can increase institutions’ resilience to emergencies. The National Agency for Information Society (NAIS) estimates that it has cut the waiting time to receive business-related documents by 20 years and eliminated more than 4 million papers originally required for construction permits (it is now a paperless system). e-Albania has helped institutions manage the COVID-19 pandemic: citizens could apply for special permission to leave the house during the emergency, and system’s interconnectedness ensured that only one person per family or per authorised business and its employees could apply per day. More than 6 million applications were filed on e‐Albania. After real-time validation, citizens received authorisation via email or SMS with a QR code to show authorities upon request.

NAIS has developed a three-phase action plan to digitalise 90% of public services by December 2020.

Source: Information provided by NAIS for this initial assessment in September 2020; presentation by NAIS at the 28th OSCE Economic and Environmental Forum (www.osce.org/files/f/documents/3/d/454948.pdf).

The regional development framework has been separated from the decentralisation process

There is no intermediate government level co-ordinating intermunicipal policy efforts to tackle territorial inequalities. This role was originally assigned to the qarku, which are both “the unit[s] where regional policies are made and implemented” (Constitution, Art. 110) and local government institutions (according to the Law “On the organization and functioning of local government”, superseded by Law No. 139/2015 “For local self-governance”). The common interpretation is that the qarku should facilitate co-ordination across municipalities and supervise their activity on behalf of the central government. The creation of the qarku was necessary to channel regional development funds under the EU Instrument for Pre-Accession (IPA) Framework. In practice, the qarku have a vague mandate.34 They lack legitimacy, since their borders were drawn irrespective of historical heritage or identities. The state and the municipalities have been reticent about sharing or giving up power to a new intermediary subnational level (Shutina, 2019[114]). Because the future of regional development policy is intertwined with that of the qarku and their governance, lawmakers have long refrained from discussing a regional development framework and completing the decentralisation process.

A new regional development framework was recently adopted. In 2015, the government introduced four Regional Management Areas, which have no administrative competences but have regional development agencies that operate under both the National Agency for Regional Development (NARD) and the Regional Economic Development Agency (REDA). By defining a set of regions without self-government, lawmakers unbundled the discussions on regional development policies and the governance of regions. This move has the merit of revamping the regional development agenda but raises issues of subsidiarity and citizen ownership of future regional policies. Through the Decision of the Council of Ministers No. 438 dated 18 July 2018, the government replaced the NARD and the REDA with the Albanian Development Fund, further centralising the management of regional development plans and weakening accountability to citizens in each region. The fund manages all local and infrastructure projects, as well as the “program of 100 villages”, which the government launched to reduce disparities between urban and rural areas.

The statistical capacity has improved significantly, but the access to administrative data and sound quality-management frameworks lag behind

The national statistical system (NSS) of the Republic of Albania consists of the Institute of National Statistics (INSTAT), the Bank of Albania and the Ministry of Finance and Economy. Other data producers include local statistics departments, line ministries or other central institutions’ statistics departments, such as civil registrar offices.35 Law No. 17/2018 “On official statistics” strengthens the role of the INSTAT as central co-ordinator of the NSS, and defines it as an independent institution with administrative and financial autonomy, reporting directly to the parliament. The Statistical Council is the body in charge of advising INSTAT in its role implementing statistical activities. It comprises 11 representatives from statistical agencies, academia, civil society, local governments, the media, users of official statistics and private entrepreneurs.

Over the past five years, Albania improved its statistical capacity significantly (Figure 5.25). The country is among the best performers in the region for foundational data, such as vital registration data, population censuses and poverty and health surveys, mainly driven by the improved periodicity of data collection. The country has been collecting and reporting data in a more timely and regular way, especially in areas that used to present large gaps, such as HIV/AIDS rates, gender equality in education and primary school completion rates (World Bank, 2020[115]). Indicators on coverage and data openness confirm these positive trends for the key areas of economic, social and environmental statistics (Open Data Watch, 2018[116]). Albania has subscribed to the Enhanced General Data Dissemination System, a framework for developing a clear roadmap to achieving higher data dissemination standards at a pace consistent with evolving statistical capacity (IMF, 2020[117]). Communication with data users, especially the media, has also improved: for example, in the past two years, the NSS issued press releases on a quarterly basis (PARIS21, 2020[118]).

Figure 5.25. Overall statistical capacity has improved in Albania

Despite overall improvements, capacities in reporting some economic statistics are lacking. Export price indices, which can be used to forecast inflation, are not available monthly or quarterly (while import price indices are) (Table 5.10). While the new statistical law gives INSTAT and the other statistical authorities a strong mandate to collect administrative data from line ministries and governmental agencies, the leading statistical agencies lack the capacities to establish efficient co-ordination mechanisms at the national and subnational levels. To improve the use of administrative data in official reporting, INSTAT could establish a quality management steering committee to discuss areas of improvement and develop data quality guidelines to be followed by all line ministries (Hackl, Redmond and Carlquist, 2018[119]).

Last, Albania is exposed to rapid social changes that require innovative statistical strategies. The large migratory movements and pertinent outward risks make the population census, which usually takes place every ten years, obsolete. Consequently, policy makers have no clear, precise and up-to-date overview of local socio-economic conditions. As discussed, this can also have severe repercussions to resource distribution across regions and municipalities. High-frequency demographic data collection via mobile phone surveys could provide a cost-efficient alternative to traditional household surveys and support the policy-making process. A second option could involve geospatial data integrated into administrative data to create a census, as is currently being explored in Slovak Republic (Gabris, 2019[120]). The infrastructure for such new forms of data collection needs to be established and NSO staff adequately trained to ensure high-quality and reliable data.

Table 5.10. Timely economic statistics are not always available
Availability of selected economic statistics, 2018
Economics statistics	Albania	Bosnia and Herzegovina	North Macedonia	Serbia
Balance of payments manual in use	✔	✔	✔	✔
Consumer price index base year	✔	✔	✔	✔
External debt reporting standard	✔	✔	✔	✔
Government finance accounting			✔
Import and export price indices
Industrial production index	✔	✔	✔	✔
National accounts base year	✔	✔	✔	✔
Special Dissemination Standard			✔
Source: World Bank (2020[115]), Statistical Capacity Indicators (database), DataBank, World Bank Group, Washington, D.C., https://databank.worldbank.org/reports.aspx?source=Statistical-capacity-indicators.

Planet – conserving nature

The Planet pillar of the 2030 Agenda for Sustainable Development reflects the need to find the right balance between socio-economic progress and capacity to sustain the planet’s resources and ecosystems and to combat climate change. Minimising environmental degradation and improving the preservation of the country’s resources, as emphasised in the National Strategy for Development and Integration 2014-2020, is needed and will be key for making Albania’s growth more sustainable and for enhancing the well-being and quality of life of all Albanians (Republic of Albania Council of Ministers, 2013[121]).

The Planet section in this chapter identifies three major environmental constraints the country faces in its development path. First, Albania remains highly exposed and vulnerable to earthquakes, floods, droughts and extreme temperatures, with 86% of its territory prone to at least two or multiple natural hazards (Duro, n.d.[122]). The underdeveloped land-use planning and the uncontrolled development of illegal construction increase the risk of physical and property damage. Second, environmental quality is deteriorating due to persistent challenges in managing solid waste and reducing air pollution and inequalities in access to water services. Better enforcement and implementation of the environmental legislation and a more transparent decision-making process will be essential. Third, while Albania does not rely on domestic coal for energy production, the continued expansion of its main energy source, hydropower, comes with serious consequences for the environment and water resources. Overall, environmental concerns seem to remain secondary in Albania, as in other regional economies, but the prospect of EU accession will be a driver of environmental reforms (Table 5.11).

Table 5.11. Planet – three major constraints to a more sustainable development in Albania
1. Albania is exposed and vulnerable to natural hazards.
2. Deterioration of the environmental quality of life remains a challenge.
3. The expansion of hydropower plants has a detrimental impact on the country’s environment and water resources, and other renewable energy sources are underdeveloped.

Albania is vulnerable to natural hazards

Albania faces earthquakes, floods, droughts and extreme temperatures

Albania is among the European countries with the highest exposure to hydrometeorological and geophysical hazards (Reliefweb, 2017[123]). Hydrometeorological hazards are frequent in Albania and the Western Balkan region. Floods accounted for the major share of disaster events between 1979 and 2019 (38%), followed by earthquakes (15%) (EM-DAT, 2020[124]). The economic loss caused by floods is estimated at EUR 2.12 billion (FAO, 2018[125]). Albania ranks high for hazard-related damages relative to other economies (Figure 5.26 – Panel A).

The 6.3 magnitude earthquake of 26 November 2019 caused significant destruction. The earthquake was one of the most devastating in the last decades, causing damage in 11 municipalities, including the most populous, Durrës and Tirana. Some 202 291 people were affected, 51 died, at least 913 were injured and around 17 000 were displaced. The earthquake is estimated to have cost around EUR 985.1 million 36 and caused damages equivalent to 6.4% of the 2018 GDP and losses equivalent to 1.1% of GDP (EU/UNDP/World Bank, 2020[126]). Most of the damages were recorded in the housing sector (78.5%), followed by the productive sector (8.4%) and the education sector (7.5%). The productive sector accounts for the highest share of losses (56.4%) (Figure 5.26 – Panel B). Some regions, especially Fier and Tirana, are more vulnerable to earthquakes than others (World Bank/GFDRR, 2017[127]).

Figure 5.26. Albania is vulnerable to earthquakes, floods, droughts and extreme temperatures

Climate change is expected to make Albania more arid, with significant social and economic impacts. Albania’s Mediterranean climate is characterised by hot, dry summers and mild winters with abundant precipitation. International climate change models predict significant temperature rise and lower precipitation in all scenarios (Ministry of Environment, 2016[128]) (Table 5.12). This will have challenging impacts on agriculture and tourism, which employ a significant share of the workforce. The dominance of rain-fed agriculture makes the sector particularly vulnerable. Precipitation is essential to Albania’s electricity production: almost 100% comes from hydropower.

Table 5.12. Like other Western Balkan economies, Albania is highly vulnerable to climate change
Change in mean annual temperature (°C) with respect to the base period (1986-2005) for the RCP 4.5 and RCP 8.5 scenarios of GHG emissions
	Albania		Bosnia and Herzegovina		Kosovo		Montenegro		North Macedonia		Serbia
RCP	4.5	8.5	4.5	8.5	4.5	8.5	4.5	8.5	4.5	8.5	4.5	8.5
2016-2035	0.5-1	0.5-1	0.5-1	0.5-1	0.5-1	0.5-1.5	0.5-1	0.5-1.5	0.5-1	0.5-1.5	0.5-1	0.5-1.5
2046-2065	1-2	1.5-3	1-2	1.5-3	1.5-2	2-3	1-2	1.5-3	1.5-2	2–3	1-2	1.5-3
2081-2100	1.5-2	4-5	1.5-3	4-5	2-3	4-5	1.5-3	4-5	2-3	4-5	1.5-3	4-5
Notes: GHG = greenhouse gas. RCP = representative concentration pathway. The mean annual temperature corresponds to the average of the maximum and minimum temperatures of a year, taking the mean average of the coldest month of the year and averaging it with the mean average of the hottest month of the year. The RCP 4.5 refers to a stabilisation scenario and RCP 8.5 to a continuous rise of GHG emissions scenario.
Source: RCC (2018[129]), Study on Climate Change in the Western Balkans Region, www.rcc.int/pubs/62.

Albania has improved disaster-prevention legislation, but implementation remains a challenge

Albania recently improved natural hazard legislation. It elaborated a comprehensive Strategy on Civil Protection and Disaster Risk Reduction. Law No. 45/2019 “On civil protection”, adopted on 18 July 2019 and replacing the Law “On civil emergencies services” from 2001, constitutes the economy’s main legal framework and introduces the concept of disaster risk reduction (DRR).37 The Normative Act “On damage relief from natural disasters” was adopted through Law No. 97/2019 on 16 December 2019, and the Decree No. 887 “Determining the rules and accelerated procedure for drafting and the approval of the compulsory local plan as well as the procedure for the approval of development/construction permits in the case of natural disaster” was adopted on 12 December 2019. Furthermore, 43 municipalities have drafted and approved General Local Plans, which include elements of DRR, identify areas at risk of natural hazards and address risks.38 In co-operation with the UNDP, Albania is preparing a National Strategy for Disaster Risk Reduction. To deal with the increased incidence of forest fires due to climate change, Albania is modernising and reorganising its firefighting system and forces, including training programmes and upgrading technical rescue and firefighting equipment.

Albania needs to address remaining weaknesses in preventing, reducing and responding to natural hazards. Albania’s legislation on civil protection and DDR still needs to be fully implemented. All sub-laws at the national, regional and municipal levels, as well as other sectoral and cross-cutting strategies and plans, need to be harmonised with the new legislation. The integration of DRR into sectoral policies is important. DRR is relevant because it reduces the damage caused by natural hazards ex ante through prevention. The Strategy on Civil Protection and Disaster Risk Reduction has not yet been adopted.39 The impact of the 2019 earthquake demonstrated the lack of modern and homogenous equipment for the operational forces, the lack of skilled human resources and the insufficient training in emergency co-ordination (EU/UNDP/World Bank, 2020[126]). It highlighted the importance of adequate capacities to anticipate, forecast, monitor, warn and inform on the risks linked to multiple hazards, which the economy needs to develop.40

The absence of land-use planning based on identified hazards and risks exacerbates the economy’s vulnerability. Building codes are outdated, and seismic hazard maps are not regularly updated. Albania needs to adopt a robust regulatory framework, where quality control is enforced and co-ordination between national and local levels is ensured (see the Peace and institutions section in this chapter). Fighting illegal construction remains a challenge. It is estimated that at least six Durrës hotels destroyed by the earthquake were built illegally. Alignment to and compliance with EU construction standards represent an opportunity to improve land-use planning and reduce seismic risks.

Albania is on the right track towards improving DDR budgeting but must improve insurance coverage. The new normative framework on civil protection and DDR, adopted in 2019, establishes that each central ministry should have a separate budget line for DRR and civil protection activities (between 2% and 4% of the annual budget) and that municipalities should allocate at least 4% of their budgets. However, these measures need to be adequately implemented at the national and subnational levels. Market penetration of disaster insurance remains very low in Albania and in the Western Balkan region (OECD, 2015[130]). Only 1-2 houses per 100 are insured (World Bank, 2017[131]). As the housing sector was one of the most affected by the 2019 earthquake, making insurance against catastrophes compulsory for every business and household will be key (see the Partnerships and financing section in this chapter).41

Preserving the quality of Albania’s environmental resources is crucial for development

The environmental quality and the rich biodiversity are important assets for Albania and its quality of life. The economy is well known for its diversity of ecosystems and habitats; rich and complex hydrographic network of rivers, lakes, wetlands, groundwater and seas; and large number of plant and animal species (CBD, n.d.[132]). Some 28% of Albania’s territory is covered by forests (World Bank, 2020[1]), and there are opportunities to develop and exploit the forest sector further. Albania’s rich biodiversity also offers opportunities for tourism and agriculture and is an important element of quality of life.

The preservation of biodiversity can contribute to the economy’s resilience against natural disasters. Forests protect against flooding, vegetation on steep slopes protects against landslides, wetlands provide overflow reservoirs for rivers, and protected areas stabilise soils, prevent desertification, preserve drought-resistant plants and help maintain natural wildfire patterns (Ministry of Environment of Japan/CEM, 2015[133]). More biodiverse agriculture preserves soil quality and protects against soil erosion while simultaneously being less affected by natural disasters, such as droughts and flooding, compared to monocultures.

Air pollution is a serious concern

Air pollution has declined but remains an important concern, with impacts on health and the economy. The country’s annual exposure to PM2.5 is 18.2 µg/m³, which is the best value in the region and an improvement from 2005 but above the EU and OECD averages (13.1 µg/m³ and 12.5 µg/m³, respectively) (Figure 5.27). Three-quarters of Albanians consider pollution a serious problem (Figure 5.28). The mortality rate due to air pollution in Albania is slightly lower than in other Western Balkan economies but remains double the EU average and 2.5 times the OECD average (Figure 5.29).

Figure 5.27. Albania's exposure to PM2.5 is below the regional average but above the OECD and EU averages

Figure 5.28. In 2019, almost three-quarters of Albanians considered pollution a serious problem

Residential heating and transport represent significant sources of air pollution, especially in Tirana and large urban areas. The transport sector accounts for 45% of overall carbon dioxide (CO₂) emissions,42 and road transport is by far the largest contributor (Ministry of Environment, 2016[128]). Nearly 87% of all cars owned by Albanians are over 10 years old, and almost 20% are over 20 years old. Some 86% of buses are over 10 years old, and one-third are over 20 years old (INSTAT/Institute of Public Health/ICF, 2018[46]). The number of passenger cars increased by 94% between 2009 and 2014 (UNECE, 2018[135]). Domestic heating also negatively affects air quality. There is no district heating infrastructure, and like in much of the Western Balkan region, a large proportion of Albanians use old stoves and wood-burning fireplaces for residential heating (UNECE, 2018[135]). PM pollution is therefore particularly high in winter. Alignment to and compliance with EU standards on gas heating and vehicle emissions represent an opportunity for Albania to reduce air pollution.

Albania needs to continue improving air quality and start regularly assessing the impact of air pollution on public health. Albania approved the National Plan for the Management of Air Quality in June 2019 to improve air quality management. Currently, the country operates seven automatic stations measuring air pollution: two in Tirana and one in Elbasan, Durrës, Korçe, Shkodër and Vlorë. Moreover, air quality data are inaccurate, as the country has no accredited laboratories for analysis (UNECE, 2018[135]). To inform policy and public health considerations, air quality monitoring should include regular assessment of the impact on health (see the People section in this chapter).

Figure 5.29. The mortality rate due to air pollution in Albania is below the regional average but more than double the EU average and 2.5 times the OECD average

Solid waste management and recycling are lacking

Despite recent steps, solid waste collection and recycling need to be improved and better funded to reduce environmental pollution. Albanians produce, on average, 462 kg of waste per year, which is below the EU and OECD averages but above the Western Balkan average (Figure 5.30). The collection and disposal system was improved in recent years, but it needs further efforts, especially in rural areas. In 2019, 87.9% of Albanians were served by municipal waste collection, an important improvement from 2018 (65.7%) (INSTAT, 2020[137]). However, fees collected by the municipalities are low and cover less than half the cost of operation (UNECE, 2018[135]; UNEP, 2016[138]). Albania has only four sanitary landfills and one waste incinerator. The majority of waste is disposed of in illegal dumpsites, and sometimes waste is illegally burned or dumped in rivers. Untreated waste has an impact not only on air and soil pollution but also on the degradation of rivers and water resources. Recycling rates are difficult to estimate, and no precise data are available. Estimations suggest that recycling stands at 5% to 12% at the national level (UNECE, 2018[135]).

The government has ambitious waste-collection targets and is expanding capacity. The National Waste Strategy and National Waste Management Plan 2010-2025, approved in 2011, set the ambitious recycling rate target of 55% by 2020. A new strategic document and the National Plan for Integrated Waste Management 2020-2035 that promote recycling and a circular economy were approved in May 2020. Two waste incinerators are under construction to improve capacity.

Figure 5.30. Albania’s waste generation rate is below the EU and OECD averages but above the Western Balkan average

Managing water services is a considerable challenge and will increase in importance

Albania is relatively water rich, with many external inflows, making co-ordination with neighbours crucial for planning, especially in the context of climate change. Albania’s 11 559.75 m³ of water per capita per year is close to the Western Balkan average and above the EU average (Figure 5.31). The share of internal water resources is around 55%, and the remaining shares are external flows from Greece, Kosovo, Montenegro and North Macedonia (Eurostat, 2018[139]). The relatively high dependency on external sources makes co-operation in the management of river basins with neighbouring economies key for current and future water policies. As there is significant variation in water availability across municipalities, Albania will need to emphasise the development of river basin-level planning and transboundary collaboration. In June 2020, Albania approved the Seman Basin Water Management Plan. Transboundary river-basin management collaboration also represents the opportunity of a first step towards regional reconciliation. The need to co-ordinate and proactively manage water will increase with climate change and decreasing precipitation. This particularly affects the agricultural sector, which accounts for more than half of Albania’s water extraction (Eurostat, 2018[139]) and depends on precipitation.

Figure 5.31. Albania is relatively water rich compared to the EU average

Citizen satisfaction with water quality is low, and access to drinking water and sewerage systems needs to be improved in rural areas. Dissatisfaction with the quality of water services stands out in Albania (Figure 3.2). Access to drinking water and sewage services in 2018 stood at 93% and 80%, respectively, among urban populations and 59% and 15% among rural populations (Water Regulatory Authority of Albania, 2018[141]).

The division of responsibilities between the central and local levels is clearly established by the current normative framework on water, but entities in charge of water management are fragmented at the subnational level. The central government is responsible for strategy setting and implementation in the water sector; municipalities are in charge of service provision. The government has entrusted water tariff-setting responsibilities to the independent water regulator, the Albanian Regulatory Authority of the Water Supply and Waste Water Disposal and Treatment Sector. The sector is highly fragmented at the subnational level, as service provision is organised among 58 water utilities serving all 61 municipalities,43 8 of which are not properly licensed.44 It will be important for Albania to align policies and legislation on water management with key EU water directives and to accelerate the capacity development of agencies in charge of water resource management, water supply, sewerage and waste (European Commission, 2020[12]).

Water infrastructure in Albania suffers from high losses and needs investment. Some 56% of water extracted for water supply networks does not reach end users, compared to 25% in the European Union (Globevnik et al., 2018[142]). Non-revenue water has been estimated at around 63% (Water Regulatory Authority of Albania, 2018[141]), which is slightly below the Western Balkan average (75%).45 Metering coverage was around 74% in 2018, which remains low but could be much lower for municipal water utilities with a coverage of 20% (Water Regulatory Authority of Albania, 2018[141]). Continuous water supply remains a challenge. In 2018, pressurised water was supplied 12.7 hours per day, on average. Only 10 out of 58 water utilities (Bilisht, Fier, Fushë Arrëz, Konispol, Korçë, Lezhë, Librazhd, Maliq, Pogradec and Tropojë) could provide 24 hours of pressurised water supply throughout the year (World Bank/IAWD, 2015[143]). Even Tirana is unable to provide continuous water supply to all customers.46

Current revenues do not cover investment costs, and the central government must subsidise expenditures. In 2018, 37 out of 58 water utilities did not cover their operational costs and continued to rely on subsidies: the central government provided EUR 80 million for investments and EUR 8 million for operating costs. Some utilities also obtained financing from international financial institutions (World Bank, 2019[144]).

Better enforcement and implementation of environmental legislation is key

The Ministry of Tourism and Environment is established but needs more human and financial resources. Law No. 10431/2011 “On environment protection”, adopted in 2013, and the establishment of the Ministry of Tourism and Environment paved the way for the development of a body of environmental protection legislation in Albania.47 After institutional changes in 2017, tourism activities were added to the ministry’s portfolio. The environmental agenda seems to be a low political priority, subordinated to the development of tourism.48 In 2020, 52 ministerial staff were working on environmental issues, with an annual budget of about EUR 7.9 million.49

Albania made important steps to reform the enforcement and implementation of environmental legislation in the context of approximation with the EU acquis. It needs to continue to increase transparency and effectiveness at the local level. The National Inspectorate for the Protection of the Territory and the National Agency of Environment are responsible for environmental inspections. However, the capacity for adequate environmental inspections remains limited due to the lack of resources, the lack of co-ordination among inspectorial bodies at the national and local levels and the lack of transparency of inspectors’ work (UNECE, 2018[135]). Implementation of new environmental-related tasks resulting from the recent territorial reform is challenging for municipalities. Despite legal requirement, few have adopted local environmental plans. Albania will need to continue efforts to achieve the full alignment of environmental legislation with the EU acquis and the full implementation of existing legislation (European Commission, 2020[12]).

Transparent decision-making processes in environmental matters and an open dialogue with civil society and other stakeholders are important

Despite recent progress, the decision-making process in environmental matters could be improved and further implicate civil society and other stakeholders. The number of requests for environmental information is increasing, and consultations with civil society and other stakeholders have been organised. Albania made important steps to improve access to environmental information at the central level and needs to pursue these efforts at the subnational level. The engagement and integration of environmental NGOs into monitoring and decision making could be improved.

According to legislation, an environmental impact assessment and public consultation are required for hydropower plant construction. In the past, however, the format and procedure of public consultation has not always been respected, as was recognised by the administrative court in the Vjosa wild river case:50 the impact assessment approved by the Ministry of Tourism and Environment in 2017 was conducted without the in situ examination of the project’s impact on groundwater and river species required by legislation. Regulatory impact assessments and public consultations are also mandatory for all new legislative initiatives, and these new management tools could help enhance and improve the environmental impact assessment process. Albania needs to review and improve environmental and strategic impact assessments on existing and planned projects (European Commission, 2020[12]).

The high reliance on hydropower gives Albania the most renewable energy profile in the region, but it cannot be expanded without environmental burden

Albania relies on domestic hydropower and carbon-based imports for electricity generation. The country generates almost 100% of its domestic electricity from hydropower (Figure 5.32). The majority of big hydropower plants are situated in the river basins of Drini, Mati and Vjosa. Because of hydropower, the overall share of energy from renewable sources in Albania was 34.9% in 2018, higher than the Western Balkan and EU averages (28.81% and 18.9%, respectively) (Eurostat, 2018[139]). However, the electricity-generation capacity is insufficient for the economy’s current needs, particularly when hydrological conditions are unfavourable. In response to variation in hydropower supply, Albania relies on importing carbon-based power from its neighbours. The share of imports ranges from 10% and 40% annually, depending on need.

Albania’s energy mix has a higher share of petroleum and oil products than other regional economies. These products accounted for 48.9% of total energy supply and 51% of final energy consumption in 2018, the highest values in the region. This can be explained by the high share of the transport sector in final energy consumption: the sector accounted for 39.3% of final energy consumption in 2018, which is above the Western Balkan average (Eurostat, 2018[139]). To reduce their share in the energy mix, Albania must modernise the outdated vehicle fleet, including private cars and public buses.

Albania’s potential for wind and solar energy can help reduce the economy’s carbon footprint and prevent the mushrooming of small hydropower plants. Albania has considerable potential for wind and solar energy (European Commission, 2016[145]), but much of it can be better developed. Albania recently introduced feed-in-premium auctions for wind and solar energy, but they are not yet effectively implemented (Energy Community Secretariat, 2018[86]). The mushrooming of small hydropower plants has been problematic and negatively affects water resources and the preservation of biodiversity. In 2015, approximately 94 small hydropower plants were constructed in or near protected areas.51 The EU integration process could help Albania diversify its electricity production away from hydropower and promote alternative sources of renewable energy, one of the European Union’s key recommendations for Albania’s energy sector for the coming year (European Commission, 2020[12]).

Figure 5.32. Albania generates almost 100% of its domestic electricity from hydropower

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[104] Youth Council of the U.S. Embassy in Albania (2017), Lufta kundër korrupsionit në sistemin e arsimit të lartë në Shqipëri. Rasti i universitetit të Tiranës, Youth Council of the U.S. Embassy in Albania, Tirana, https://useycalbania.org/wp-content/uploads/2017/10/Korrupsioni-ne-Arsimin-e-Larte-ne-Shqiperi-rasti-i-Universitetit-te-Tiranes.pdf.

Notes

← 1. The national estimate of the birth sex ratio in 2019 was 109 boys born for every 100 girls.

← 2. Youth unemployment rates (aged 15 to 24) between 2012 and 2019 dropped by about 3.1 percentage points to 26.7%, which is relatively low compared to the Western Balkan average of 30.4% (World Bank/Vienna Institute for International Economic Studies, 2020[13]).

← 3. Calculation based on World Health Organization data (WHO, 2018[152]).

← 4. Interview with the State Labour Inspectorate in Albania in February 2020.

← 5. Interview with the Ministry of Finance and Economy in Albania in February 2020.

← 6. Estimated data for the Western Balkans are for 2015 (Bartlett and Oruč, 2018[149]).

← 7. OECD calculations based on data from the Albanian Labour Force Survey and Administrative Data on Labour Market (INSTAT, 2020[150]; INSTAT, 2020[151]).

← 8. Interview with NAES in Albania in February 2020.

← 9. The gap between actual and planned spending was 43.4% of the planned budget in 2019 (Wort, Pupovci and Ikonomi, 2019[42]).

← 10. The index does not include Kosovo or Montenegro.

← 11. The natural gas Transadriatic Pipeline (TAP), which links Greece with Italy and other Western European countries, and the hydropower plant investments on the Devolli river.

← 12. Key incentives in the zones include value added tax (VAT) exemptions on manufacturing-related imports; 50% reduction in profit tax for the first five years; deductible expenses of 20% of the annual capital for the first three years; supply of Albanian goods in the zone considered export supply at zero VAT rate; buildings exempted from immovable property tax for five years; zone developers and users exempted from property transfer tax; expenditures on salaries and contributions recognised at 150% of their value in the first year (same applies but only for salaries in subsequent years); training and research and development costs recognised as expenses at twice the value for ten years. Additional fiscal and non-fiscal incentives are provided for strategic sectors.

← 13. A key challenge in this area stems from the underdeveloped VET system. Modernising the system and improving its market relevance is a key priority for the government, and progress has been made. Notably, the VET legal framework has been strengthened with these objectives in mind, and work-based learning has been brought into many vocational schools. More progress is needed to expand these programmes, and more public funding is needed for the VET system, which still relies significantly on donor support (about one-third of VET schools) (European Commission, 2020[41]).

← 14. Index does not include Kosovo.

← 15. The National Diaspora Strategy 2021-2025 also aims to reorganise the management of migration flows, reform electoral citizens to enfranchise Albanian voters abroad, and promote identity, language, culture and art.

← 16. The survey includes 158 000 companies in 144 economies.

← 17. There are, for example, five overlapping strategic action plans on energy efficiency: the National Action Plan on Energy Efficiency 2011-2018 (DCoM, No.619/07.09.2011), the National Action Plan for Renewable Energy Sources 2015-2020 (DCoM, No. 27/20.01.2016), the Second Plan and the Third National Energy Efficiency Action for Albania 2016-2020 (DCoM, No. 709/01.12.2017), the National Action Plan for Renewable Energy Sources 2018-2020 (DCoM, No.179/28.03.2018) and the National Consolidated Action Plan on Renewable Energy Sources 2019-2020 (DCoM, No.580/28.08.2019).

← 18. Between 1997 and 2013, the number of parties increased from 19 to 68, while the average share of votes obtained by party decreased from 5.3% to 1.5%. Coalitions were usually very large. In 2013, the Aleanca për Shqipërinë Europiane was led by the Partia Socialiste e Shqipërisë (which obtained 41.36% of votes) and was composed of 36 other parties (on average, 0.45% of votes). The Partia Demokratike (30.63% of votes) led the Aleanca për punësim, mirëqenie dhe integrim, which included 24 other parties (on average, 0.37% of votes).

← 19. Social and infrastructure spending, usually supervised by agencies, targets specific interest groups rather than the public good more often in Albania than in any other regional economy, according to V-Dem indicators (Coppedge et al., 2020[147]).

← 20. Examples of regulators include the National Agency for Territorial Planning under the Ministry of Infrastructure and Energy and the National Agency for Scientific Research and Innovation under the Ministry of Education, Sports and Youth. The General Directorate for the Prevention of Money Laundering under the Ministry of Finance and Economy is considered a law enforcer.

← 21. Between 2013 and 2016, the number of parties competing for a seat in the national assembly decreased from 68 to 17.

← 22. Low trust in the judiciary is a common issue in the region. On average, 35% of citizens in the Western Balkans have confidence in courts.

← 23. This is an optimistic scenario that does not consider the time required to deal with appeals to KPK decisions (which today amount to roughly 30% of verdicts).

← 24. The pace of resolution of cases is already high. In 2018, the then-six judges resolved 1 673 cases, or 279 cases each. This means that the Supreme Court took 20 days to complete a trial, whereas other courts took 64 days, on average (Këshilli i Lartë Gjyqësor, 2019[148]).

← 25. According to Law No. 115/2016, the KLGj and the KLP are composed of six peer judges (or prosecutors) and five lay members elected by the national assembly. These councils replace the High Council of Justice through which the President of the Republic and the Minister of Justice could steer the career of judges and prosecutors at all levels. In principle, the law ensured the independence of the other two new institutions too. The new JAC, which screens candidates for the Constitutional Court and the High Justice Inspector, is made up of judges and prosecutors from all levels elected annually through a lottery. The High Justice Inspector is elected by the national assembly but from among candidates ranked by the JAC.

← 26. In 2005, restitution claims were estimated at around USD 5 billion. The government distributed USD 10 million for financial compensation in 2007 and 2008 and budgeted USD 6.5 million in 2009 (USAID, 2016[100]).

← 27. According to Food and Agriculture Organization data, the average farm size increased from 0.73 ha to 1.26 ha between 2005 and 2011, but it remains small compared to other Western Balkan averages: 3.2 ha in Kosovo (2014 data), 4.6 ha in Montenegro (2010) and 5.4 ha in Serbia (2012).

← 28. Focal points in all relevant ministries periodically report to the NCAC about the anti-corruption activity of their institutions. According to interviews conducted for this initial assessment, these reports can be delayed, incomplete or badly written.

← 29. Clientelist pressure is highest in Montenegro (23%) and lowest in Serbia (8%) and North Macedonia (7%). The share of respondents who reported receiving an offer of money or favours in exchange for a vote was 15% in Bosnia and Herzegovina and 13% in Kosovo.

← 30. In every region, a prefect appointed by the central government controls the realisation of the functions and responsibilities delegated to municipalities by the central government. Municipalities are governed by mayors and city councils directly elected by citizens.

← 31. Between 1991 and 2018, the share of the population living in rural areas decreased from 64% to 40%.

← 32. Local authorities’ own responsibilities include infrastructure, water supply and sewerage, and cleaning and waste removal. They also share responsibilities, for example for social services, health care and education, with the central government.

← 33. For instance, municipalities have exclusive responsibility for waste collection and treatment, drinking water and sewerage, PHC, preschool and primary education. The Agency for Support of Local Self-Governance was created to support municipalities with the provision of local services.

← 34. As a result, the IPA development funds are allocated directly to local government units without intermediary channels.

← 35. Those data producers are not officially designated by the statistics law; however, they produce data at times used as official statistics (WTTC, 2020[66]). In the peer review published in 2018, Eurostat recommended including the data producers in a broader list of official statistics producers inside the NSS (Hackl, Redmond and Carlquist, 2018[119]).

← 36. Albania has experienced many earthquakes in the last century. One of the most significant occurred in 1967, causing 18 fatalities and costing EUR 129 million in damages (World Bank/GFDRR, 2017[127]).

← 37. Law No. 45/2019 “On civil protection”, adopted on 18 July 2019, also introduces the elaboration of national and local strategies for DRR, the importance of harmonisation of urban planning with DRR at the national and local levels, and risk assessments for development projects and civil emergency plans at all levels.

← 38. Law No. 107/2014 "On territorial planning and development" defines the basic principles. A General National Territorial Plan is designed to put into practice the legal framework for territorial planning and development. It provides the mandatory reference framework for all plans drafted in Albania. Furthermore, a considerable number of municipalities have drafted and approved or are in the process of drafting General Local Plans (Planet e Përgjithshme Vendore) for their administrative territories. These plans provide the reference framework for the protection and usage of local governance units’ administrative territories.

← 39. There is a draft document (February 2020).

← 40. Based on an interview with government counterparts during the OECD mission 2-7 February 2020.

← 41. In 2016, the government and the Albanian Financial Supervisory Authority announced an initiative to make catastrophe insurance compulsory for businesses and households. A law is currently under revision.

← 42. Emissions from the energy and transport sectors accounted for 97.07% of CO₂ emissions in 2005 (Ministry of Environment, 2016[128]).

← 43. Since the adoption of Law No. 115/2014 “On the territorial and administrative division of local government units in the Republic of Albania”, which determines the administrative-territorial division of the country into 12 regions and 61 municipalities. Albania was previously divided into 12 regions and 373 local government units (65 municipalities and 308 communes).

← 44. Interview with representatives of the water sector in Albania in February 2020.

← 45. Reliability and accuracy of data reported by water utilities remain problematic, according to the Water Regulatory Authority of Albania.

← 46. Interview with the municipality of Tirana in February 2020.

← 47. The country’s institutional framework counts, with specific complementary laws linked to the environment: for example, Law No. 10448/2011 “On environmental permits” and Law No. 10440/2011 “On environmental impact assessment”, which entered into the force in 2013, as well as more specific sectoral laws on air protection (Law No. 162/2014 “On protection of ambient air quality”, entered into force in 2017) and on nature protection (Law No. 9587/2006 “On biodiversity protection” and Law No. 8906/2002 “On protected areas”).

← 48. Interview with donors and NGOs in February 2020.

← 49. Based on information provided by the Ministry of Tourism and Environment and the OPM in April 2020.

← 50. In this case, public consultation on the construction of a large dam took place but without the affected local community. Instead, employees of the municipality of Fier, living 80 km away and not located in Vjosa, took part.

← 51. Interview with the NGO sector in Albania in February 2020.

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