Albania A Series of Summary Policy Notes

Towards More, Better and Sustainable Jobs for Albania

World Bank Group ProductJune 2018

© 2018 International Bank for Reconstruction and Development / The World Bank Group

1818 H Street NW

Washington DC 20433

Telephone: 202-473-1000

Internet: www.worldbank.org

This work is a product of the staff of the World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of the World Bank, its Board of Executive Directors, or the governments they represent.

The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown in this work do not imply any judgment on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

Rights and PermissionsThe material in this work is subject to copyright. Because the World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given.

Any queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, the World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org.

Table of Contents

Executive Summary...................................................................................................................................8

Synthesis Note 1: Labor Market Outcomes.............................................................................................12

Synthesis Note 2: Labor Market Institutions...........................................................................................18

A. Labor regulations.........................................................................................................................19

B. Labor taxation..............................................................................................................................21

C. Minimum wage............................................................................................................................23

D. Unemployment benefits...............................................................................................................25

E. Maternity leave............................................................................................................................26

F. Employment Services..................................................................................................................28

Synthesis Note 3: Labor Demand............................................................................................................31

A. Promoting high-quality job creation through market competition..............................................33

B. Infrastructure for growth..............................................................................................................35

C. Leveraging trade to access larger markets...................................................................................37

D. Attracting and retaining private investment.................................................................................38

E. Harnessing the potential of financial markets..............................................................................39

F. Unlocking the land market...........................................................................................................41

G. Providing reliable electricity access.............................................................................................42

H. Ensuring effective contract enforcement and a reliable administration.......................................43

I. The right fiscal policy to encourage business and preserve macro-fiscal sustainability.............44

Synthesis Note 4: Labor Supply..............................................................................................................46

A. Fostering greater foundational skills development through early childhood and pre-university education..............................................................................................................................................48

B. Fostering job-relevant skills through Vocational Education and Training (VET) System..........51

C. Building on the Foundation of Higher Education Reform...........................................................55

D. Tackling Albania’s migration challenge, including brain drain/Identifying sectors for skills demand assessment..............................................................................................................................56

Synthesis Note 5: Labor Market monitoring...........................................................................................60

A. Strengthening general Labor market statistics.............................................................................61

B. Monitoring skill building.............................................................................................................64

C. Strengthening the National employment service.........................................................................65

D. Monitoring migration and labor mobility....................................................................................66

Matrix of Policy Actions identified through this series of notes.............................................................68

WB Macro-Fiscal Forecast for Albania...................................................................................................76

4

Acknowledgments:

This series of synthesis policy notes has been prepared in March and April 2018 on a just-in-time request of the Government of Albania by a team of World Bank experts led by Christoph Ungerer and Hilda Shijaku. Maddalena Honorati is the main author for synthesis note 2 on labor market institutions. Flora Kelmendi is the main author for synthesis note 4 on labor supply and skills. Report contributors include Jieun Choi; Johanna Jaeger; Keler Gjika; Jose Guilherme Reis; Michael Joseph Ferrantino; Tanja K. Goodwin; Harald Jedlicka; Violane Konar-Leacy; Shaun Mann; Jeren Kabayeva; Silvia Mauri; Zahid Hasnain; Srdjan Svircev; Kathrine M. Kelm; Artan Guxho; Gazmend Daci; Salvador Rivera; Martha Martinez Licetti; Marta Caminas Mora; Jing Xiong; Patricia Lopez; Drita Dade; Laureta Qorlazja; Stefanie Brodmann; Periklis Saragiotis; Roberto Echandi; Svetlana Edmeades; Valerie Morrica; Gloria La Cava; Arvo Kuddo; Micheline Frias; Ergys Islamaj.

The team is grateful to Linda Van Gelder (World Bank Regional Director for the Western Balkans); Maryam Salim (World Bank Country Manager for Albania); Gallina A. Vincelette (World Bank Practice Manager for Macroeconomics, Trade and Investment); Marco Hernandez (Program Leader for the Western Balkans – Equitable Growth, Finance and Institutions); Timothy A. Johnston (Program Leader for the Western Balkans- Human Development); Jamele Rigolini (Program Leader for the Western Balkans – Human Development); Simon David Ellis (Program Leader for the Western Balkans – Sustainable Development) and the Western Balkans Country Management Team for their guidance and support throughout this task.

This series of notes benefited from close cooperation with Deputy Minister Dajna Sorensen of the Albanian Ministry of Finance and Economy and Director Delina Ibrahimaj of the National Statistical Office Instat. It also benefited from comments and feedback through several roundtable workshops with Albanian Government Institutions as well as discussions with international development partners.

Table of Acronyms:

ACA Albanian Competition AuthorityADR Alternative dispute resolution mechanismAEO Authorized Economic OperatorsAES Adult Education SurveyAIDA Albanian Investment Development AgencyAITPP Property Treatment Agency and Agency of Inventory and Transfer of Public PropertiesALMP Active Labor Market PolicyALUIZNI Agency for Legalization, Urbanization and Integration of Informal Zones/ConstructionsAMTP Agricultural land allocation documentAQF Albanian Qualification FrameworkASA Advisory Services and AnalyticsBoA Bank of AlbaniaCEFTA Central European Free Trade AgreementCID Center for International DevelopmentDB ranking World Bank Doing Business RankingDEA Data Envelopment AnalysisEBRD European Bank for Reconstruction and DevelopmentECEC Early Childhood Education and CareEGRA Early Grade Reading Assessment ELSTAT Greek Statistical AuthoritiesEPP Employment Promotion ProgramERP Economic Reform ProgramFDI Foreign Direct InvestmentGCI World Economic Forum Global Competitiveness IndicatorGDP Gross Domestic ProductILO International Labor OrganizationIMF International Monetary FundINSTAT National Statistical OfficeIPRO Immovable Property Registration Office of AlbaniaIT Information TechnologyKESH Albanian power generation companyLCE Last country of emigrationLCS Labor Cost SurveyLEK Albanian local currencyLFS Labor Force SurveyLSMS Living Standards Measurement SurveyM&E Monitoring and EvaluationMAP Multi-annual Action Plan for a regional economic area in the Western BalkansMELQO Measuring Early Learning Quality and OutcomesMFC Multi-Functional CentersMFE Ministry of Finance and EconomyMSMEs Micro, Small and Medium-sized EnterprisesNAVETQ National Agency for Vocational Education and Training and Qualifications

NBFIs Non-Bank Financial InstitutionsNE Ndihma Ekonomike - social assistance programNEET Not in Employment, Education or TrainingNES National Employment ServiceNESA National Skills and Employment AgencyNPLs Non-Performing LoansNSDI National Strategy for Development and IntegrationNSS National Statistical SystemNSW National Single WindowOECD Organization for Economic Co-operation and DevelopmentOPS Official Program of StatisticsOSHEE Albanian distribution companyOST Albanian power transmission companyPCF Per capita financingPEFA Public Expenditure and Financial Accountability AssessmentPFM Public Financial ManagementPIAAC Programs for the International Assessment of Adult CompetenciesPIM Public Investment ManagementPISA Performance on International Student AssessmentPPP (1) Public Private PartnershipPPP (2) Purchasing Power ParityREBIS Regional Balkans Infrastructure StudySCD Systematic Country DiagnosticSEE South-East EuropeSES Structured Earnings SurveySPS Sanitary and Phyto-SanitarySTEP Skills Towards Employability and ProductivityTIMSS Trends in International Mathematics and Science StudyUI Unemployment insuranceUNDP United Nations Development ProgramUSD United States DollarVAT Value-added taxVET Vocational education and trainingVTCs Vocational training centersWBG World Bank Group

7

Executive Summary

Albania successfully transitioned from the poorest nation in Europe in the early 1990s to reaching middle-income status in 2008 – but Albania’s recent jobs and growth performance has lagged behind the country’s aspirations. Robust growth averaging at 6 percent before the global financial crisis benefited the less well off, with poverty falling by half in both rural and urban areas. The rapid pace of growth helped the country narrow the per capita income gap with the rest of Europe – from 18 percent of average European Union (EU) incomes in 1998 to 30 percent by 2012 – and fueled its aspirations to join the EU. However, the global financial crisis in 2008-9 and the subsequent Eurozone crisis exposed the country’s vulnerabilities: a consumption driven growth model primarily financed through foreign transfers and a failure of labor markets to absorb the workers released through the urbanization process. In the aftermath of Albania’s crisis of 2013-14, growth slowed to less than half of the pre-crisis period. Trends in poverty and income convergence were quickly reversed. Despite the economic upturn of the last few years, jobs and growth still lag behind Albania’s aspirations. Labor force participation is low - especially among women and the young-, the unemployment rate is high and much of employment is in low-wage sectors. Formal private sector employment represents one-half of total paid employment, pointing to a still high informal sector share. To achieve income convergence and shared prosperity, Albania needs determined further reform implementation to develop a new model for jobs and growth.

To help reinvigorate job creation and growth, this series of synthesis policy notes identifies key reform options for Albania. This series of policy notes looks at 5 interlinked aspects of the issue. The first note addresses the question of What is Albania’s labor market performance today? This overview note takes stock of Albania’s labor market indicators, benchmarking against regional peers and identifying segments of the population that have so far been left behind. The second note asks How can Albania’s labor market institutions and regulations be strengthened to facilitate job creation? The theme of the third note is How can Albania create the right business environment to enable job creation? The fourth note addresses the question of How can Albania equip its citizens today with the right skills for the jobs of tomorrow? A final note proposes recommendations to strengthen labor market statistics to better monitor progress on Albania’s jobs and growth agenda going forward.

Framework for series of synthesis policy notes: How can Albania create more, better and sustainable jobs?

What is the performance of Albania’s labor market today?

The analysis emphasizes policy reforms to create the right conditions for more, better and sustainable private sector jobs. The availability of good and stable employment is a basic requirement for the economic prosperity and social cohesion of Albania. Yet, Albania’s unemployment rate – albeit recently falling – remains at a high level of around 13 percent. Many Albanians that do have a job are stuck in low quality employment. Informality, part-time employment and self-employment are widespread. Given high government debt and fiscal consolidation needs, greater public-sector-led spending and employment is not in itself a sustainable solution. Nonetheless, Government can play a key role in enabling an environment in which the private sector can create more, better and sustainable jobs. This series of notes aims to help identify next step policy actions to move forward along this reform agenda.

Albania needs to trace its own path forward – however, international experience highlights Albania’s vast potential for (i) further reallocation of labor towards higher value-added sectors and (ii) increasing labor productivity within each sector. Exploiting this potential is key to creating better employment opportunities. First, neighboring countries have substantially reduced the share of employment in agriculture as people (in particular the youth) moved to the cities. This has played a key role in increasing aggregate productivity, allowing larger farms to develop economies of scale and allowing for the growth of higher-value added activities in manufacturing and services in urban areas. In Albania, the scope for further reallocation of labor out of agriculture is still large – though frictions such as a complex land market need to be addressed and the transition needs to be carefully managed in both urban and rural areas. Second, productivity per worker lags behind neighboring countries across many broad sector categories. The potential to increase within-sector value added per employee is large. Albania needs to move to higher productivity activities within value-added chains. Market forces need to be allowed to weed out unproductive firms and to allow high-performing companies to thrive.

How can Albania create the right business environment to enable job creation?

To unlock larger productivity and wage gains, the Government can help to create a business environment that enables Albania’s entrepreneurs to explore opportunities higher up the production value-chain – including access to markets, finance, foreign know-how and a stable policy environment. To strengthen Albania’s labor market performance, employers need to create more job vacancies and demand more labor. The public sector can play a critical role in creating the right business environment and enabling the private sector to grow and to create jobs. A stronger business environment is key to allow Albanian companies to move up the value-chain and to create better paid employment. By attracting Foreign Direct Investment (FDI), a better investment climate can bring international know-how and capital to Albania. By allowing domestic firms to become internationally competitive and to explore export markets, a better business climate can help overcome the challenge of a small domestic market. A key element of the business environment needs to be to create a reliable legal environment, including vis-à-vis property ownership. Policy options identified include measures such as (i) implementing the Multi-Annual Action Plan (MAP) for a Regional Economic Area in the Western Balkans, (ii) developing a reliable property registry and (iii) streamlining court proceedings.

How can Albania equip its citizens today with the right skills for the jobs of tomorrow?

Policy reforms are needed to ensure that Albanians acquire the skills necessary to meet the demands of a growing manufacturing and service sector. Given the public-good nature of an educated workforce and given the constraints that households face when investing in their human capital, the Government of Albania has a key role to play in providing an education system that can prepare

10

Albania’s citizens for the jobs of tomorrow. Yet, despite recent improvements, educational attainment and the quality of Albania’s education system remains low relative to other countries in the region. To strengthen the education system, this note proposes a series of reforms to pave the way towards a stronger education system – accompanying young Albanians from pre-school to primary and secondary school to university and vocational education training (VET). Policy options identified include measures such as (i) the development and adoption of a national education budget optimization strategy, (ii) reinforcement of the VET qualifications quality chain, including systematic impact evaluations, and (iii) implementation of the Higher Education Law, including quality assurance of higher education institutions (HEI).

How can Albania’s labor market institutions and regulations be strengthened to facilitate job creation?

To fully activate Albania’s existing workforce, Albania can strengthen labor market institutions to encourage workers – particularly women and the young – to fully utilize their potential. By easing labor market regulations and by reducing the cost of employment, Governments can make job creation more attractive for employers – with potentially large and broad-based impact across the economy. By designing a basic unemployment safety net that encourages the able-bodied to rebound from joblessness and to rejoin the working population, Albania can ensure that all contribute to a more vibrant and inclusive economy. By improving the resources and the quality of employment services, Government can better connect job seekers with employment opportunities. Such labor market policies have the potential to reshape labor market performance by mobilizing the existing supply of labor and matching it more efficiently with labor demand. However, these policies need to find the right trade-off between protecting workers and giving firms the flexibility needed to encourage job creation. Policy options identified include measures such as (i) limiting the minimum legal notice period to one month, irrespective of tenure, and capping the minimum severance pay at 6 months, (ii) reviewing the existing child care systems in Albania with the aim of incentivizing shared parental care responsibilities and (iii) reshaping the mix of employment promotion programs (EPPs).

How will progress on Albania’s job creation reform effort be monitored going forward?

A successful policy action plan to create more, better and sustainable jobs for Albania will require an expanded and reliable system of labor market statistics as well as a comprehensive monitoring and evaluation (M&E) framework. First, dissemination of high quality and comparable data creates ground for an informed decision making of all economic actors in the country. Harmonization with best practices and EU standards is key. Reliable and timely labor statistics is needed to identify the need for policy interventions and to inform the design of new reforms. Second, data is key to monitoring the implementation of reforms, making the Government accountable and setting the right incentives for policy makers – while identifying when policy reforms do not work out as intended and further modifications to policy are needed. To complement data, a clear M&E framework needs to be developed by the Government, (i) setting reform outcome targets that can clearly be measures against baseline performance of the labor market, (ii) clarifying responsibilities across agencies in implementation of the M&E framework (who does what and when) as well as (iii) specifying how M&E results are regularly translated into an updated action plan on jobs and growth of the Government. Policy options identified include measures such as (i) evaluating the possibility to collect and systematize information of data on vacancies and worker/job transitions in and out of employment, (ii) developing a regular report on skills sought by employers and (iii) regular published evaluations by INSTAT of the extent of employment and wage under-reporting in the main labor market statistics.

The World Bank Group is committed to continue supporting Albania on the path towards more, better and sustainable jobs. This series of policy notes identify a roster of policy actions and represent

11

the beginning of a process. Albania now needs to decide which actions to prioritize, how to sequence reforms and then move forward with the implementation of the resulting action plan. The team would like to thank the Albanian Authorities for the excellent discussion and cooperation in the preparation of these just-in-time policy notes.

12

Synthesis Note 1: Labor Market OutcomesWhat are the challenges facing Albania’s labor market today?

This note presents a concise overview of Albania’s labor market performance today, setting the stage for the subsequent synthesis policy papers in this series. The focus is on identifying the key ongoing challenges and trends that form the context for Albania’s jobs and growth action plan.

While Albania’s employment rate is higher than that of other Western Balkan economies, it still lags behind the employment rates of EU countries in the region - employment among women, youth and the residents of the major urban centers is particularly low. Policy needs to tackle these pockets of low employment and low labor force participation. Female employment rates continue to lag behind male employment rates by nearly 12 percentage points, likely reflecting cultural norms about family structure and a lack of alternatives to stay-at-home care for children and the elderly. Albania’s high NEET rate of 27.0 percent – the percent of the population between 15-24 that is not in employment, education or training – and a comparatively low rate of employment for the high-skilled segment of the labor force suggests that the quality of educational opportunities needs to be improved. Low employment rates in the urban centers of Vlore, Tirana and Durres suggest a lack of jobs, particularly where agriculture cannot soak up excess labor.1

Albania’s employment rate (% of 15+) lags behind regional EU countries, though it is ahead of Western Balkan peers…

… the percent of youth (15-24) not in employment, education or training (NEET) is among the highest in the region

XKBAMKMERSALHRBGHUAT

0 10 20 30 40 50 60 70

48.7

AT

HU

HR

RS

BG

ME

MK

BA

AL

XK

0 5 10 15 20 25 30 35

27.0

Source: SEE Jobs Gateway Database 2016 data

A key challenge for Albania is to improve the quality of employment opportunities – poorly paid and informal jobs are widespread. The average remuneration rate of Albanian workers is 774 Euros per month (2016 data; purchasing power parity PPP adjusted) - the lowest among all Western Balkan countries. Over 30 percent of jobs are informal, preventing workers from joining the State’s social welfare system and benefiting from the protection of labor regulation. The share of part-time jobs (21.0 percent of male employment) and self-employed (34.9 percent of total employment) is highest in the

1 Jobs Gateway Database 2016.

14

region – likely signaling a lack of full-time regular employment rather than a preference for flexible self-directed work arrangements. 2

These labor market outcomes partly reflect the structure of Albania’s economy – agriculture continues to absorb 38 percent of total employment, while manufacturing and services is underdeveloped.3 Albania’s agricultural sector provides a natural conduit to absorb excess labor into often low-productivity and low-pay employment. This helps explain Albania’s relatively high employment rate (particularly among the low-skilled) coupled with the prevalence of low-pay, informal, part-time and self-employment work arrangements. Developing higher productivity activities along the value-chain (both within the agri-food complex and beyond in manufacturing and services) would create opportunities to access higher quality employment.

The quality of employment opportunities lags behind. The salaries of Albanian workers are the lowest in the region…

… and the high rate of informality (%) stands out, limiting the effectiveness of worker protection under the law and the reach of public services

ALBGRSXK

MKBAHUMEHRAT

0 500 1000 1500 2000 2500 3000774.2

Average monthly gross wages, EUR (PPP)RS

MK

MD

RU

UA

AL

0 5 10 15 20 25 30 35

31.9

Source: SEE Jobs Gateway Database; ILO; 2016 data

Recent labor market dynamics benefit from the ongoing economic recovery – underlying growth in high-end and better-paid sub-sectors is still limited. Close to 193.000 new jobs4 were created between 2013 and 2017 – driven by Albania’s labor-intensive growth in textiles, tourism, other trade services, health and administrative services. These developments have been facilitated by Albania’s renewed economic stability and the availability of workers willing to work at low wage following the crisis. However, this labor-intensive growth model has shown signs of running out of steam. As wage growth has accelerated, employment growth slowed in 2017. The determined implementation of structural reforms will play a key part in sustaining current positive labor market trends in Albania, especially to support Albania’s gradual move towards higher value-added and high-wage sub-sectors.

2 Jobs Gateway Database 2016.3 INSTAT 2017 data4 INSTAT 2017 data

15

While unemployment has been falling recently, it remains high.5 At above 13 percent of the labor force by end-20176, unemployment remains high by European standards. Nevertheless, only half of the unemployed seek employment through state mediation services, suggesting that social assistance, job seeker centers and active labor market policies (ALMPs) need to be better structured to help employ the unemployed.

Albania’s economic recovery has been concentrated in labor-intensive manufacturing and services …

… the recovery has helped to bring down the still high unemployment rate…

AgricultureIndustry

ConstructionTrade

ITAdmin services

GovernmentOther services

0 10 20 30 40 50 60

Employment Value-added

Growth (% 2015-17)2016 Q1

2016 Q2

2016 Q3

2016 Q4

2017 Q1

2017 Q2

2017 Q3

02468

1012141618 16.6

15.5 14.7 14.2 14.2 13.9 13.612.0

10.7 9.88.8 8.3 7.8 7.2

LFS Administrative Data

… though the job-intensity of growth slowed in 2017…

… and wages have increased significantly in key sub-sectors

2014 2015 2016 20170.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1.82.2

3.43.8

1.3

4.8

6.5

3.3

GDP Employment

Annu

al g

row

th ra

te (%

)

95 100 105 110 115 120 125 130 135 140 14595

100105110115120125130135140

20142015

20162017

2014

2015

2016

2017

2014

2015

20162017

Retail ConstructionIndustry

Employment Index (2014=100)Real

wag

e in

dex

(201

4=10

0)

5 One factor that reduced the number of registered jobseekers in 2016 was a change in the law, mandating that all unemployment benefit recipients register through the National Employment Services.6 INSTAT 2017 data

16

Job creation has been concentrated in low-wage sectors

20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 110,000

-20000

-10000

0

10000

20000

30000

40000

50000

Agri

Mining

Manufactur-ing

ElectricityWater

Construction

Trade

TransportAccom

IT FinancialReal estateProfessional

Admin

PublicEducation

Health

Arts

Other

R² = 0.309136782101548

Average wage per employee (LEK; 2017)

Chan

ge in

em

ploy

men

t (2

0114

-17)

Source: INSTAT

Large scale emigration continues to be the most evident symptom of a lack of good jobs – and itself depresses the local labor market. On the one hand, the brain drain associated with emigration leads to the loss of some of Albania’s most productive and entrepreneurial workers to other economies abroad. Significant remittance inflows from diaspora communities discourage those that stay in Albania from participating in Albania’s low-wage labor market. On the other hand, emigration reflects poor job prospects in Albania. Respondents from focus group discussions undertaken in Albania7 cite high levels of unemployment and under-employment, low incomes both in formal and informal sectors (sometimes paid with delay), limited social protection and low provision of social services as main motives for emigration.8

Neighboring countries such as Greece highlight Albania’s vast potential for (i) further reallocation of labor towards higher value-added sectors….

… and (ii) the potential for increasing productivity within each sector

AgricultureIndustry

ConstructionTrade

ITFinance

AdminPublic servicesOther services

0 5 10 15 20 25 30 35 40 4540.2

12.86.5

18.61.31.0

3.413.0

3.1

11.39.3

4.933.3

2.12.0

8.521.7

7.0

Employment share (% of total)

GR AL

Agriculture

Construction

IT

Admin

Other services

0 50 100 150 200 25014.6

28.240.3

25.370.871.1

50.324.8

80.8

21.491.0

31.542.6

101.5142.0

36.759.2

192.6

Value-added per worker (PPP-adjusted; USD)

GR AL

Source: INSTAT and ELSTAT services; 2016 data

7 World Bank: Returnee Migrant Vulnerability Studies in 6 Balkan countries (currently work-in-progress, March 2018); conducted as part of ASA on Supporting the Effective Reintegration Of (Roma) Returnees in the Western Balkans (P160112).8 The decline of emigration during the recovery of 2014-17 reflects positive labor market dynamics in this period.

17

Albania needs to trace its own path forward – however, neighboring countries highlight Albania’s vast potential for (i) further reallocation of labor towards higher value-added sectors and (ii) increasing labor productivity within each sector. First, neighboring countries have substantially reduced the share of employment in agriculture as people (in particular the youth) moved to the cities. This has played a key role in increasing aggregate productivity, allowing larger farms to develop economies of scale and allowing for the growth of higher-value added activities in manufacturing and services in urban areas. Urbanization is likely to persist in Albania, though an effective land titling framework is needed to allow an active market for rural land. Second, productivity per worker lags behind neighboring countries across many broad sector categories. The potential to increase within-sector value added per employee is large. Albania needs to move to higher productivity activities within value-added chains. Market forces need to be allowed to weed out unproductive firms and to reward high-performing companies.

Facing these challenges, determined further implementation of structural reforms is necessary to create more, better and sustainable jobs for Albania – this series of notes identifies possible policy options. Given high government debt and fiscal consolidation needs, greater public-sector-led spending and employment is not in itself a sustainable solution. However, the public sector can play a critical role in implementing further structural reforms and creating the right environment for private sector job creation. The Government can help to ensure that Albanians acquire the skills necessary to meet the demands of a growing manufacturing and service sector. To unlock larger productivity and wage gains, the Government can help to create a business environment that enables Albania’s entrepreneurs to explore opportunities higher up the production value-chain – including access to markets, finance, foreign know-how and a stable policy environment. However, these measures will take time to bear fruit. To fully activate Albania’s existing workforce, Albania can strengthen labor market institutions to encourage workers – particularly women and the young – to fully utilize their potential. Labor market regulations need to find the right trade-off between protecting workers and giving firms the flexibility needed to encourage job creation. This series of synthesis policy notes aims to further discuss policy options in each of these areas – offering a menu that the Government of Albania can draw on to stimulate internal debate and to develop its action plan for jobs and growth in Albania.

18

Synthesis Note 2: Labor Market InstitutionsHow can Albania’s labor market institutions be strengthened to facilitate

job creation?

This note synthesizes key policy options to strengthen Albania’s labor market institutions and to facilitate job creation. By easing labor market regulations and by reducing the cost of employment, Governments can make job creation more attractive for employers – with potentially large and broad-based impact across the economy. By designing a basic unemployment safety net that encourages the able-bodied to rebound from joblessness and to rejoin the working population, Albania can ensure that all contribute to a more vibrant and inclusive economy. By improving the resources and the quality of employment services, Government can better connect job seekers with employment opportunities. Such labor market policies have the potential to reshape labor market performance by mobilizing the existing supply of labor and matching it more efficiently with labor demand. Relative to measures that aim to strengthen foundational education or to implement broader business environment reforms, these measures can have an impact that can be felt rapidly.

Labor market policies entail particularly deep and difficult trade-offs - for instance between employee rights and employer flexibility - that can shape the character of Albanian society for years to come. Politically, labor market reforms are often difficult to implement, mobilizing protests from strong vested interests. Policy trade-offs are often stark and touch on key economic and social objectives of the Government. A coalition for change needs to be formed through inclusive debate – and a decisive Government is then needed to implement the resulting decisions. This note aims to support this debate.

To stimulate discussion on the right labor market policies for Albania, this note highlights key policy dimensions (i) in which Albania deviates from international practice and (ii) in which reform could stimulate job creation in Albania. Specifically, key issues will be briefly discussed drawing on existing evidence on the following six areas: i) labor regulations; ii) labor taxation; iii) minimum wages; iv) unemployment benefits; v) maternity leave entitlements; vi) employment services and employment promotion programs.

A. Labor regulations9

While Albania’s labor code overall already offers a good balance between flexibility for employers and security for employees, this section highlights specific articles that deviate from the regional norm and which may suppress job creation. This section provides comparative data on main provisions in the labor law in the Western Balkans and beyond.

Albania is in a minority of countries that prohibits fixed-term contracts for permanent tasks. Albania and Serbia are the only two countries in the Western Balkan region that still restrict fixed term contracts to temporary positions.10 According to the Doing Business 2018 database, fixed-term contracts are allowed for permanent tasks in 123 countries (65 percent). While these fixed term contracts strengthen the bargaining power of employers and can be abused, they can also encourage firms to create more jobs. 9 As listed in the Labor Code of the Republic of Albania, dated 12.07.1995 (as amended in 1996, 03 and 2015)10 According to Article 140 of Albania’s labor code, the conclusion of the employment contract for a specified period should be justified by objective reasons, related to the temporary nature of the position for which the employee will be hired.

20

This note synthesizes key policy options to strengthen Albania’s labor market institutions for facilitating job creation. The note covers labor market policy and regulation, interactions between the labor market and social welfare as well as employment facilitation services.

Employers can more flexibly adjust their labor force to respond to demand fluctuations - simply by not renewing fixed term contracts, rather than terminating workers on open-ended contracts. This is particularly relevant for job creation in innovative and new business areas, where uncertainty about expected demand is high and flexibility of employment arrangements can be particularly valuable to employers.

Regulated paid leave for emergencies (in addition to regular annual leave) puts a significant burden on employers – and could be replaced by unpaid leave. As is stipulated in Article 96 of Albania’s labour code, employers are obliged to provide up to 30 days of paid leave in case of serious illness of family members, cohabitant, direct predecessors or descendants, as certified by a medical report. While a part of this paid leave is funded through the Social Insurance Institute, this nevertheless adds to labour costs - especially for micro and small enterprises. While such a leave should be provided, most countries provide it in the form unpaid leave. Alternatively, the right for paid leave in case of emergency could be left for negotiation in individual or collective employment contracts, rather than stipulated by law.

Albanian employers are legally required to provide much longer notice periods for contract termination than the international norm – particularly for workers with long tenure. Advance notice is a means to give workers ample warning of future layoffs, and thus facilitate job search. While the employee has no obligation to provide a reason for notice of termination, in most countries, the employer must provide notice for contract termination according to law. The period of notice is a cost-factor for employers, as employment of workers - once notice is given - is often involuntary and unproductive. In upper middle-income countries, such as Albania, 39 percent of countries have a notice period below one month, and 20 percent of countries do not have notice periods at all. In contrast, in Albania (article 143 of the Labor Code), the notice period is one month during the first year of employment, the notice period is two months between the second and fifth year of employment and the notice period is three months for more than five years of employment.

Legally required severance pay for employees with long-tenure is high when compared to other countries in the region. Albania, as most other countries, uses a sliding scale for severance pay. By design, this makes severance pay more generous for more senior workers. However, compared to other countries in the Balkans, the principle is applied more generously in Albania. The seniority-related compensation equals the equivalent of a 15-day salary for each completed working year. This can make separations from senior staff very costly for firms. To tame high severance pay for senior staff, other countries have therefore added an overall cap on severance pay levels. For example, in Bosnia and Herzegovina, minimum severance pay is one third of the average monthly salary paid to the employee in the last three months of employment, for every full year of tenure with the employer. However, the total severance pay may not exceed six average monthly salaries paid to the employee in the last three months of employment. By making job separations less costly, employers can be encouraged to hire more workers in the first place.

Innovative and simplified contracting instruments could help to formalize short-term and casual jobs. As economies and labor markets evolve, a wide variety of employment contracts have developed. These contracts differ significantly in degree of employment security and in the types of benefits that must be provided to workers. Temporary employment contracts and different forms of atypical contracting are emerging to facilitate the formalization of short term and casual workers. Most of these atypical forms of contracting have the potential to contribute to labor market innovation and to make employment more attractive for both employers and a wider range of potential workers. For example, Albania could consider the introduction of voucher-based work for seasonal workers in specific sectors where informality is high, such as agriculture and trade services. Voucher-based work establishes an employment relationship based on payment for a service, with a voucher purchased from an authorized organization that covers both pay and social security contributions.

21

Share of countries in which fixed-term contracts are not prohibited for permanent tasks in 2017, percent of countries

Notice period for redundancy dismissal after 10 years of continuous employment in weeks of salary in 2017; percent of countries

Low income

Lower middle income

Upper middle income

High income

Total

0 10 20 30 40 50 60 70

3

12

20

15

13

60

56

39

31

45

3

4

16

16

11

33

29

24

38

31

More than 8.7 weeks of salary4.3-8.6 weeks of salaryLess than 4.3 weeks of salaryNo notice period

Source: Doing Business, World Bank, 2017 Source: World Bank, 2017

Priority reform actions for discussion include:

Amendment of labor code (article 140) to allow for fixed term contracts for permanent positions.11

Amendment of labor code (article 96) to replace paid leave for emergencies with unpaid leave for emergencies (in addition to regular paid annual leave)

Amendment of labor code to cap legally mandated notice period to one month, irrespective of tenure

Amendment of labor code to cap legally mandated severance pay to six monthly salary payments

Amendment of labor code to allow for simplified contracting instruments, such as voucher-based work

B. Labor taxation

Taxes on labor (personal income taxes and social security contributions) reduce labor demand by driving up labor costs and reduce labor supply by lowering the after-tax return on working. The higher the marginal effective tax rate, the lower the incentives to work. Labor taxes create a tax wedge between labor costs to the employer and the worker’s take-home pay. Coupled with high levels of

11 While this policy recommendation aims to give employers greater flexibility in using fixed term contracts, Albania needs to avoid the emergence of a dual labor market in which a class of workers with permanent contracts enjoys strong labor protection, while a class of fixed term workers is stuck in low quality employment . Albania’s labor code already specifies an “equal treatment” clause between temporary and permanent contracts. This clause needs to be preserved to avoid the emergence of a “dual” labor market.

22

Low income

Lower middle income

Upper middle income

High income

Total

0 10 20 30 40 50 60 70 80 90

50

64

57

80

65

unemployment and social assistance benefits12, taxation can result in unemployment traps in which unemployed or informally employed people have a financial disincentive to seek formal employment – thereby losing benefits and becoming subject to tax. Equally, if taxes are progressive, they can result in a low-wage trap in which higher taxes and lower benefits make it unprofitable to move from a low income to higher income job. In most European countries, both the amounts paid by businesses in terms of labor taxes and the overall level of taxes on employment income are high. In Albania, the tax wedge on average salaries of 57,100 Leks (INSTAT) was 31.9 percent in 2017. This is high for an upper middle-income country - but relatively low compared to high income countries.

Tax wedge: Income tax plus employee and employer social security contributions as a percentage of labor costs in OECD countries, 2014

BelgiumAustria

GermanyHungary

FranceItaly

FinlandCzech Republic

SwedenSloveniaPortugal

Slovak RepublicSpain

GreeceEstoniaTurkey

DenmarkNetherlandsLuxembourg

NorwayOECD (36.0%)

PolandIceland

JapanUnited States

CanadaUnited Kingdom

IrelandAustralia

SwitzerlandKoreaIsrael

MexicoNew Zealand

Chile

0.0 10.0 20.0 30.0 40.0 50.0 60.0

Income tax Employee SSC Employer SSC

Source: http://www.oecd.org/ctp/tax-policy/taxing-wages-tax-burden-trends-latest-year.htm

12 The ongoing reforms (since January 2018) in the Ndihma Ekonomike social assistance program are addressing the work disincentive design issue by changing the eligibility rule. “Having a job” was one of the exclusionary filters which would disqualify the working poor from receiving NE benefits; coupled with taxation it was clearly creating disincentives to work.

23

However, Albania remains burdened by high public debt and limited fiscal space. Before any labor tax reductions can be considered, the Government needs to take measures to sustainably strengthen tax compliance and expenditure efficiency. The close links between contributions and benefits introduced in the recent pension reform need to be preserved. The tax base needs to be broadened, before effective tax rates can be lowered for those that do pay their taxes. Any potential benefits from a lower tax rate need to be weighed against potential fiscal risks and the cost of further reducing government expenditure and public services.

Box: Examples of concrete tax policy actions adopted in European countriesThe options listed below are provided as examples of reforms adopted by European countries to reduce the cost of labor, and hence promote formal job creation. In depth assessments of the benefits and costs of each action proposed below in the context of Albania will be needed before considering applying them to Albania. Caution is warranted regarding impact of such reforms on the budget, capacity of the tax administration, and the predictability of tax environment. Should these policy actions be considered in Albania, fiscal impact analysis would be needed. While lowering the tax wedge might partly finance itself through increased revenues due to higher employment and output, these are likely to be insufficient to fully compensate for the lower contribution or tax rates. Therefore, the examples below are illustrative and should be treated strictly within their own country context.

(i) In many countries the tax legislation sets up a social contribution floor which is different from the minimum wages. For example, in order to accommodate part-time workers, the social contribution floor could be set below the minimum wage. Lower floors are often established for self-employed, farmers, or those voluntarily insured. In some countries (e.g., Switzerland, Bulgaria), persons who are not engaged in paid employment or are not insured on any other ground, are still obliged to pay minimum contributions at their own expense.

(ii) In many countries, a ceiling on contributions on insurable earnings has been established, as a fixed amount and is also taken into account when calculating the benefits (e.g., Spain, Cyprus, Bulgaria), or as a multiple of average wages (e.g., Slovakia, Romania, the Czech Republic), the minimum gross wages (e.g., Romania for sickness and maternity benefit contributions), or using some other benchmark.

(iii) In some countries employees’ contribution rates vary depending on the level of taxable earnings (e.g., United Kingdom and Austria).

(iv) In some countries, there are alternative regimes for small enterprises – aiming to encourage their formalization. For example, in France, for general health insurance schemes for employees, and for accidents at work and occupational diseases, a flat-rate deduction of employers’ contributions of €1.50 per hour has been established for companies with less than 20 employees.

(v) Reduced taxes on low income earners, older workers and women/secondary earners. Analysis in OECD countries using household income survey data suggests that households in the lowest income quartile face a much higher effective tax rate than those in higher income groups. The effective tax schedule is in fact regressive at the range of employment income below 70 percent of average wage income. Better designed tax brackets for disadvantaged groups can increase incentives to search for better-paid employment and to work more hours.

C. Minimum wage

24

While an appropriately set minimum wage can protect workers from exploitation and raise low-end salaries, a minimum wage set too high can deter employers from creating low-wage jobs – which can particularly hurt vulnerable groups. According to the European Commission (2012), “setting minimum wages at appropriate levels can help prevent growing in-work poverty and is an important factor in ensuring decent job quality.” As part of its Decent Work Agenda, the ILO(2013) also encourages Member States to adopt a minimum wage to reduce working poverty and to provide social protection for vulnerable employees. In particular, the ILO Minimum Wage Fixing Convention No. 131 states that elements to be taken into consideration in determining level of minimum wages include: (a) Needs of workers and their families, taking into account the general level of wages in the country, cost of living, social security benefits, and relative living standards of other social groups; and (b) Economic factors, including requirements of economic development, levels of productivity, and desirability of attaining and maintaining a high level of employment. The Convention sets up the following other principles: (i) Once established, minimum wages have the force of law; (ii) Most workers should benefit from protection of the minimum wage, although exceptions are possible; (iii) Social partners should be fully consulted (not just informed); and (iv) Minimum wages should be adjusted from time to time. Neumark (2014) offers a useful summary of the academic literature evaluating the impact of the minimum wage on employment.

Table: Kaitz index in selected European countries in 2016Kaitz index Kaitz index

Czech R. 0.34 Poland 0.43France 0.49 Slovakia 0.39Germany 0.42 Slovenia 0.48Greece 0.33 UK 0.41Hungary 0.39 Romania 0.41

Source: OECD online at: https://stats.oecd.org/Index.aspx?DataSetCode=MIN2AVE

The level of Albania’s minimum wage is now comparable to international benchmarks – once normalizing for average wage levels. The ratio of the nominal legal minimum wage (which is 24,000 Leks as of December 2017) to average wage in the economy (so-called Kaitz index) is not particularly high in Albania (42 percent overall based on latest estimates form INSTAT as of December 2017). However, the ratio is high in certain sectors, such as agriculture, and trade, transportation and storage, accommodation and food services sectors – though wage underreporting may distort the results of this analysis.

Table: Wages by sector, and ratio of minimum wages to average wages (Kaitz index) by sectors in Albania in as of December 2017

Average wages, lek

Kaitz index

Total 57,069 0.42Agriculture 37,744 0.64Mining and quarrying; Electricity, gas and water supply 49,430 0.53Construction 51,714 0.46Trade, Transportation and storage, Accommodation and Food Services 39,496 0.61Information and communication 90,844 0.26Financial and insurance activities 142,471 0.17Real estate activities, Professional, Scientific and Technical Activities, 6,465 0.37

25

Administrative and Supportive ServicesPublic administration and defense; Compulsory social security, Education, Health and Social Work Activities 64,574 0.37

Other Services 55,825 0.43Source: INSTAT.

D. Unemployment benefits

While unemployment insurance (UI) benefits can help individuals to sustain job-search during periods of joblessness and can help support aggregate demand and the macroeconomy during downturns, they can also reduce the incentives of the unemployed to search for new jobs. The extent to which unemployment benefits contribute to unemployment remains under debate.

The generosity of Albania’s UI system is very low compared to other countries in the region. In 2017, the UI benefit equaled 6,850 Leks (49 EUR) per month – equal to 29 percent of the minimum wage, or 12 percent of the average wage in the economy. This is significantly lower than in comparator economies of the region. For instance, in Bulgaria, the amount of unemployment benefit is 60 percent of the average daily contributory income of the job seeker for the preceding 24 months (but not less than a fixed minimum amount). In Croatia, for the first 90 days of registered unemployment, the benefit amount cannot exceed 70 percent, (HRK 3,979.50 (€529)), and for the rest of the payment period it cannot exceed 35 percent (HRK 1,989.75 (€264)) of the national average net wage of the previous year. In the Czech Republic, the benefit for the first two months equals 65 percent of reference earnings; the following two months, 50 percent of reference earnings, and 45 percent of reference earnings for the rest of the support period. In Hungary, the job-seeker benefit amounts to 60 percent of the beneficiary’s earlier average wage (with a fixed maximum amount).

The percentage of unemployed receiving unemployment benefits - the coverage ratio - is very limited. The coverage of unemployment benefits in Albania is very low compared to other Western Balkan and EU countries. The coverage of UI benefits fell from 10 percent in 2000, to 7.6 percent in 2010 to 2.2 percent of registered unemployment (1,900 jobseekers) in 2017. Given many unemployed do not register, this represents less than 1 percent of total unemployed – one of the lowest ratios of unemployment beneficiaries in ECA region. Many unemployed either do not have the necessary contribution history to be eligible for benefits, are long-term unemployed benefiting from the Ndihma Ekonomike social assistance program or find the low unemployment benefit level too unattractive to register as unemployed.

Percentage of unemployed receiving unemployment benefits in selected European countries; percent (2015 or later available data)

26

BiHAlbania

SerbiaMacedonia, FYR

CroatiaGreece

SloveniaMontenegro

Italy FranceAustria

Germany

0.0 20.0 40.0 60.0 80.0 100.0 120.022

912

2021

2636

3895

100100

Source:ILO at: http://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/---publ/documents/publication/wcms_604882.pdf

Note BiH – Bosnia and Herzegovina. The bars refer to the percentage of total unemployed (based on LFS) that receive unemployment benefits. In Albania 2 percent of total unemployed received unemployment benefits in 2016.

Given the low generosity and the low coverage of unemployment benefits, the current system is unlikely to create significant disincentives to search for work in Albania today – in fact, a more meaningful unemployment insurance system may (i) help some Albanians to better afford periods of search for the job that best matches their skills and (ii) enhance worker demand for formalized employment. Albania may consider intervening to create a more meaningful unemployment benefit to support the welfare of its unemployed. Albanians without means and family support today need to rush to find a replacement job once they are laid off. A higher benefit level could allow these workers to afford a longer period of search for the job that best uses their skills – increasing the quality of employment matches. Rolling out such a modern unemployment insurance system would involve a gradual increase in the generosity of unemployment benefits, coupled with linking the level of benefits with previous contributions to the system – creating an incentive for workers to seek formal employment and to pay their contributions to the system. Such a roll-out would need to be closely aligned with the Government’s fiscal sustainability targets.13

Albania could consider to pilot an alternative payment of unemployment benefits (as lump-sum) to those unemployed willing to start their own business. Paying unemployment benefits as a lump-sum could be beneficial for those job seekers who want to launch a small business, hence insuring jobseekers for the job loss but also promoting micro-entrepreneurship . Although the amount of money is small, it might help to pay business registration fees, for example. The lump-sum payment delivery modality (instead of monthly payments) could be established for more “entrepreneurial” job seekers upon the submission of a sound business plan. Lump sum payment of unemployment benefit is established in Serbia, for example, although rigorous evidence on the effects on job creation (firm start-up) is not

13 Basic social security guarantees that ensure universal access to essential income security at least at a nationally defined minimum level are discussed in the ILO Social Protection Floors Recommendation, 2012 (No. 202)   and the Social Security (Minimum Standards) Convention, 1952 (No. 102).   The duration of the benefit shall vary with the length of the contribution period. For unemployment benefits, the floor is suggested at least 45 percent of the reference wage (e.g., previous earnings of the beneficiary). ILO Convention No. 168 recommends periodic payments of at least 50 percent of reference wage. Total benefits must guarantee the beneficiary healthy and reasonable living conditions.

27

available to date. Therefore, a careful assessment should be made prior to introducing such schemes in Albania.

Priority reform actions for discussion include:

Reform of the unemployment insurance scheme, allowing for meaningful unemployment benefits for those with strong contribution history

E. Parental leave14

While maternity leave regulation helps women to combine starting a family with having an active working life, long absences from the labor market can have adverse effects on women’s careers. Maternity leave is an important public policy measure to protect the health of mothers and children during the final months of pregnancy and the first few months after delivery. Using legislation to protect the rights of young mothers also helps to ensure equal opportunities for women and men at the workplace (EC, 2008). However, long maternity leave can have an adverse effect on women’s labor market participation by reducing women’s attachment to the labor market. It can result in an actual or perceived erosion of their skills and their competitiveness. Generous maternity leave is a cost for employers that can deter employment of women in the first place. In fact, evidence from the Albania STEP employer survey shows that employers are reluctant to hire or promote women of child-bearing age due to the associated indirect costs (such as having to hire temporary replacement workers) of maternity leave, particularly if it is for an extended time. Women are not seen as less capable than men per se, but family responsibilities appear to affect their labor market opportunities (Albania STEP employer survey, Honorati and Johansson 2018 forthcoming).

Albania has one of the longest maternity leave durations in the world. Women have the right to claim maternity leave of up to 365 days (including a minimum of 35 days prior to and 63 days after the child delivery). The monthly benefit is 80 percent of the insured's average daily wage in the last 12 months for the period of leave before childbirth and for 150 days after; and 50 percent for the remaining period.15 Basic international standards regarding maternity leave entitlements are laid down in the ILO’s Maternity Protection Convention No. 183 of 2000 and the Maternity Protection Recommendation No. 191 from the same year. The convention calls for a period of maternity leave of not less than 14 weeks, including six weeks' compulsory leave after childbirth unless otherwise agreed at the national level by the government and the representative organizations of employers and workers. Mothers must be provided with cash benefits at a level that ensures that the woman can maintain herself and her child in proper conditions of health and at a suitable standard of living. The amount of such benefits must not be less than two-thirds of the woman's previous earnings.

Table: Maternity benefits in selected European countries

Source of funding PeriodPercentage of wages paid during covered

periodAlbania Employer, employee and self-employed 365 days 80; 50

14 Maternity leave provisions in European countries:http://www.missoc.org/MISSOC/INFORMATIONBASE/COMPARATIVETABLES/MISSOCDATABASE/comparativeTablesSearchResultTree.jsp; https://rm.coe.int/table-4-missceo-summary-2017/168077f66815 In addition, the family is also entitled to a birth grant. A lump sum equal to up to 50% of the monthly minimum wage declared by a decision of the Council of Ministers. The benefit is currently 11,000 leke (79 EUR).

28

Austria Employer, employee and government 14 weeks 100Bosnia and Herzegovina Employer and government 365 days 50-100

Croatia Employer, self-employed and government 30 weeks 100France Employer, self-employed and government 16 weeks 100Germany Employer, employee and government 14 weeks 100Greece Employer, employee, self-employed

and government (subsidy) 17 weeks 100

Italy Employer, self-employed and government 5 months 80Macedonia, FYR … 9 months 100Montenegro Employer, employee, self-employed

and government 365 100

Serbia

Employer, employee and self-employed 140 days

100% of earnings are paid for the first

six months; 60% from the sixth to the

ninth month; and 30% for the last

three months; up to a ceiling

Slovenia Employer, employee, self-employed and government 105 days 100

Source: ILO online at: http://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/---publ/documents/publication/wcms_604882.pdf

Albania could consider enhancing incentives for mothers to return to the labor market, perhaps by allowing to keep a portion of the maternity leave benefit while returning back to work within the period of maternity leave, or allowing to split maternity leave entitlements with father. For example, in Croatia, after the compulsory maternity leave period, upon her own request, the mother can resume work before the child reaches 6 months of age. The father can use the remaining period of the maternity leave, if the mother agrees. In the Czech Republic, the leave and benefit can be transferred to the father, but only after six weeks from birth. In Italy, the father may claim for a paid leave of up to three months after the child’s birth in case the mother does not claim it or in case he has the sole charge of the child. Albania could also consider increasing the incentives to share parental responsibilities.

Priority reform actions for discussion include:

Review of the existing child care systems in Albania with the aim of incentivizing shared parental care responsibilities

F. Employment Services16

A core function of Albania’s National Employment Service (NES) is to connect job seekers with employment opportunities - alleviating search frictions. The role of Albania’s National Employment Service (NES) is to assist jobseekers in job search and increase their employability or capacity for entrepreneurship, through skills training and other active labor market programs (ALMPs). The services offered by the NES include registration of jobseekers, job intermediation, counseling services and guidance for jobseekers, preparation of and checking eligibility documents for unemployment benefits, 16 This section extensively on Honorati and Johansson 2018a; and on Schnabl, A., H. Hofer, S. Lappöhn, A. Pohl, and H. Zenz (2017).

29

vocational training, and employment promotion. The NES works through 36 branch offices, of which 24 are local offices and 12 operate at the regional level.

The NES needs to be substantially strengthened to allow it to effectively perform its duties. In 2016, about 94,000 unemployed were registered with NES, about 54 percent of the total unemployed based on the LFS.17 The number of jobs facilitated through the NES was low. Only 17,000 NES registered jobseekers were employed through NES mediation services (about 18 percent of registered unemployed), 1,989 through employment promotion programs (38 percent of participants) and 691 immediately after completing the vocational training courses in Vocational Training Centers (VTCs) (about 9 percent of participants).18 Only 7.4 percent of hiring firms used NES to recruit workers (Albania STEP employer survey). The caseload (or the ratio of unemployed jobseekers per NES counselor) was 327 in 2016, relatively high compared to EU countries, although lower than in Serbia and FYR Macedonia. Set against a staff/client ratio of 1:150 in the EU and 1:100 according to the International Labor Organization’s (ILO) recommendations (Kuddo, 2012), the NES ratios are quite high and preclude individualized and intensive services for the unemployed.

The NES needs to modernize its mediation and counseling services. First, the NES could adopt explicit annual performance agreements with each branch office. These agreements could be used to track and improve the effectiveness of each office. Various methodologies have been developed in other European countries, ranging from corporate score cards to sophisticated data analysis—like, for example, Data Envelopment Analysis (DEA) - to monitor performance, define key performance indicators, and set targets. Second, the NES could formulate a strategy to better reach out to employers, possibly though introducing assessment centers that can test skills and personality traits of applicants or by offering specialized training courses for existing and new staff of firms. Third, the NES could roll out a modern case management framework, including evidence-based tailored guidelines on what kind of support is most effective for different types of job seekers (based on age, gender, education, length of job search, participation in the Ndihma Ekonomike (NE)). Fourth, the NES should consider upgrading its IT system. An online platform exists to provide information on vacancies and training courses, but information on vacancies is not shared across districts. Data availability and data accuracy are problematic.19

It is recommended to consider introducing performance-based contracting of private sector providers for selected intermediation services for certain hard to serve groups (vulnerable registered jobseekers). The use of performance-based contracting makes part (or all) of the contract value contingent on job placement outcomes.

Priority reform actions for discussion include:

17 The number of NE beneficiaries registered with NES is however expected to increase given the current government’s effort to nationally roll out the new eligibility rule for Ndihma Ekonomike (NE) cash transfers. The national roll out of NE started on January 1st , 2018; registration with NES for working age unemployed applicants is an eligibility condition according to the new eligibility rule and procedures to qualify to NE cash support.18 Numbers from the Labor Force Survey (LFS) differ from those provided by the NES, but suggest a similar picture.19 The IT system needs to monitor the number of employers contacted, number of contacts with employers, number of vacancies, number of job placements due to mediation services and after participation in EPs, number of staff. The NES M&E capacity could be enhanced through upgrading the IT software and the introduction of M&E tools (and relative training to NES staff) to (i) enable data exchange among NES branches, (ii) offer online services; (iii) track progress on services provided to jobseekers (EP programs, vocational training and intermediation services); (iv) monitor services offered to employers; (vi) monitor NES performance based on agreed performance indicators and regularly disseminate and update labor market trends.

30

Introduction of improved NES performance management of branch offices and performance-based contracting for private sector job intermediation service providers

Development of strategy to improve NES outreach to employers, possibly though introducing assessment centers that can test skills and personality traits of applicants; or specialized training and re-training courses for existing and new staff of firms

Introduction of an effective case management framework, with a focus on creating tailored approaches to support Ndihma Ekonomike (NE) beneficiaries and other vulnerable groups

Upgrade of the NES labor market IT system, including sharing of vacancy information across districts and improving general NES monitoring and evaluation (M&E) capacity

The NES currently runs seven small-scale Employment Promotion Programs (EPP) – these are mostly wage subsidy schemes and evidence on their impact is limited. While the average budget for EPPs increased over time, the overall coverage of Albania’s EPP remains highly limited: only about 5.5 percent of registered jobseekers participate in employment promotion programs. Most of these EPPs are structured as wage subsidies to promote employment of disadvantaged groups. The effectiveness of these programs in creating sustainable jobs remains highly controversial.20 Most subsidies go to the footwear industry, where incentive to maintain jobs created through the EPP are limited once the subsidy runs out. EPP participants are often the better educated and not necessarily those belonging to vulnerable categories (NE beneficiaries, long term unemployed, people with disability, returning migrants and other vulnerable groups such as Roma, Egyptians). The Monitoring and Evaluation (M&E) of Albania’s EPPs is weak, and there is no rigorous evaluation of the impact of the programs for different sub-groups (with a well-defined counterfactual)21. Regular and rigorous impact evaluations for programs should be introduced to properly assess the impacts of EP and adult vocational training programs on employment outcomes for different population groups including most vulnerable categories (NE beneficiaries, women, Roma, first labor market entrants, people with disability, returning migrants). Based on successful impact evaluations, upscaling of EPPs could be considered: candidates include the self-employment program piloted by UNDP and the apprenticeship program piloted by Swiss Contact on secondary schools.

Priority reform actions for discussion include:

Introduction of rigorous and regular impact evaluations for all EPP programs

Reshaping the EPP mix: (i) phasing out of ineffective schemes, (ii) consolidation of similar programs, (iii) diversification of EPPs by piloting new types of schemes and (iv) scaling-up programs with a proven track-record

20 Factors the positively influence their effectiveness include: (i) the reduction of the information asymmetry between the employer and the jobseeker, (ii) the adjustment (prevention) of human capital (loss); (iii) building skills (and experience) through learning on the job. Factors against wage subsidies relative to other active measures and intermediation services include: (i) the cost; (ii) they send negative signal to potential employers on skills of the participant; (iii) potential substitution effect (displacement of current workers); (iv) windfall effects. Empirical evidence from robust impact evaluation have mixed results on employment and earnings (McKenzie 2017, Kluve et al 2017, Card 2015).21 An study based on quasi-experimental methods has been commissioned by UNDP to estimate the impact of 2 EP programs and their cost-benefit ratios. However, the identification strategy and the validity of the control group is weak to statistically meaningful impact results.

31

Introduction of targeted activation measures for Ndihma Ekonomike (NE) beneficiaries that are closely coordinated with State Social Services

It is recommended to consider introducing performance-based contracting of private sector providers for selected (i) intermediation services and (ii) employment promotion programs, particularly for certain hard to serve groups (vulnerable registered jobseekers). The use of performance-based contracting makes part (or all) of the contract value contingent on job placement outcomes. For instance, competitive grants programs for private training providers can demonstrate good results and know-how in training programs and strong linkages with the firms in the private sector. This could allow the government to tap on the promising providers (in priority sectors), and at the same time scale up provision of training.

Introduction of performance-based contracting for private sector (i) job intermediation services and (ii) job relevant skills training

32

Synthesis Note 3: Labor DemandHow can Albania create the right business environment to enable job

creation?

This note proposes possible priority reform actions to strengthen labor demand in Albania by enabling a favorable business environment and by creating the right conditions for employers to create more and better jobs in a sustainable manner. To strengthen Albania’s labor market performance, employers need to create more job vacancies and demand more labor. Given high government debt and fiscal consolidation needs, greater public-sector-led spending and employment is not in itself a sustainable solution. However, the public sector can play a critical role in creating the right business environment and enabling the private sector to grow and to create jobs. A stronger business environment is key to allow Albanian companies to move up the value-chain and to create better paid employment. By attracting Foreign Direct Investment (FDI), a better investment climate can bring international know-how and capital to Albania. By allowing domestic firms to become internationally competitive and to explore export markets, a better business climate can help overcome the challenge of a small domestic market.

Albania continues to score poorly on several Doing Business Indicators …

… also compared to regional peers

Source: World Bank 2018 DB Distance-to-frontier ranking (0 is lowest ranking country and 100 is the best performing country)

Source: World Bank 2018 DB ranking

Albania has already made significant improvements to its business climate in recent years, but much needs to be done. Albania is ranked 75 out of 137 countries in World Economic Forum Global Competitiveness Report (GCI) 2017-18, which is based in significant part on a business executive survey and perceptions of competitiveness gaps. This is the highest CGI rank Albania has achieved since 2008 and an increase of 5 places from the previous year. Albania is ranked 65th among 190 economies in the World Bank Ease of Doing Business (DB) 2018 ranking, which analyses business regulations and how they are applied. This represents a decrease of 7 places over the prior year’s ranking, but still a significant improvement from 90th in 2016.

34

This note synthesizes key policy options to strengthen Albania’s business environment, enabling firms to create more and better jobs.

Reform actions across a wide spectrum of policy domains need to come together from different directions to all contribute to strengthening Albania’s business environment, creating the right conditions for more, better and sustainable job creation

This synthesis note builds on recent existing analysis of priority areas for growth in Albania and identifies key reform needs in each of these areas. This includes the Government of Albania’s National Strategy for Development and Integration (NSDI) 2014-20, Albania’s Economic Reform Program (ERP) 2016-18, the 2017 ERP European Commission Assessment, the World Bank Systematic Country Diagnostic (SCD) for Albania (2015), the South-East Europe (SEE) 2020 Strategy and the Harvard Center for International Development Growth Diagnostic (2017). To identify current bottlenecks in each of the identified reform areas, the note relies on consultation with sectoral experts as well as current international benchmarking databases, including the 2018 DB ranking and the GCI 2017-18. Key data sources are summarized in the appendix.

A. Promoting high-quality job creation through market competition

Enhancing competition through effective competition policy can promote innovation and the productivity growth necessary for the creation of higher quality jobs. Although Albania was the first

35

Strengthening the business environment

Unlock the land market

Leveraging trade

Improving Infrastructure

for growth

Harnessing the potential of

financial markets

Attract and retain

investment

Enforce property rights

Provide reliable electrity access

Improve market

competition

Provide a stable macro fiscal framework

Western Balkan country to enact a competition law (1995), in 2014 its competition policy indicator (2.3 out of scale from 1 to 4.3) scored below the average of new Member States (3.4), according to EBRD transition indicators. In the perception indicators of the World Economic Forum GCI 2017-18 report, Albania ranks at 114th place in terms of market dominance, at 102nd place in terms of effectiveness of anti-competition policy and at 100th place in terms of intensity of local competition (out of 137 countries). Yet, increased competition is necessary to push incumbent firms to innovate, become more productive and to create higher paying jobs in Albania. It opens the door for new entry, expanding into new markets and creating demand for labor in innovative products and services. As competition helps to drive down prices, the cost of business for other companies in the economy falls and can stimulate economic activity. The Government can promote effective antitrust rules and enforcement, advance pro-competition market regulation and ensure a level playing field for public and private enterprises.

In particular, cartels increase prices, restrict output and stifle job creation – the investigative powers of the Albanian Competition Authority (ACA) need to be strengthened. Cartels are agreements between competitors to limit competition, for instance by agreeing to fix prices or limit output, to increase cartel profits. On average, these agreements increase the price of critical goods and services by 49 percent22 - stifling market demand and inhibiting job creation. While one of the roles of the ACA is to break up these cartels, it has tackled only a few domestic cases23 and it has not pursued any company for cartel offences outside its jurisdiction. 24 To strengthen the ACA, the competition law needs to further limit exemptions to cartel agreements, clarify how hard-core cartels (which limit competition) will be evaluated vis-à-vis other agreements between companies25 and enhance investigative capacities of the ACA to prosecute international cartels. A strengthened role of the ACA could help ensure that its sanctioning powers are effectively deterring cartel formation in the first place, especially if combined with a strengthened implementation of its leniency program, such as training on handling leniency applications (i.e. confidentiality) case handlers, or dissemination and communication campaign for Albania’s leniency programs for cartel members that come forward to expose illegal agreements 26. A stronger institutional set-up is needed to prevent competition-distorting government intervention in markets and ensuring a more level playing field in key sectors. Government involvement in markets can give advantage to certain market participants over others, distorting competition, creating inefficient market outcomes and potentially preventing job creation. Total reported state aid stood at 0.4 % of GDP in 201527. The State Aid Commission has therefore been set up to block subsidies and other forms of state aid to guarantee competitive neutrality.28

Yet, the performance of the Commission remains challenging: it adopted seven decisions in 2014 and nine in 2015 and has issued no decisions ordering recovery of unlawful aid29. Between 2006 and 2016, the

22 “Cartel overcharges are skewed to the high side, pushing the average overcharge for all types of cartels over all time periods to 49%” (Cartel Overcharges and Optimal Cartel Fines, in 3 Issues in Competition Law and Policy 2203 (ABA Section of Antitrust Law 2008))23 For example, between 2013 and 2015, it has only fined 4 anti-competitive practices, not all of which were necessarily cartels - Global Legal Insights “Cartels 2018 Albania”. https://www.globallegalinsights.com/practice-areas/cartels-laws-and-regulations/albania 24 Global Competition Review “The Handbook of Competition Enforcement Agencies 2017”. 25 Article 4 does not make distinction between horizontal and vertical agreements, nor between horizontal agreements considered ‘hard-core’ (to limit competition) versus other agreements and concerted practices. 26 The Albanian Competition Law includes the possibility to grant leniency (Art. 77). The success of a leniency program depends, among others, on clear procedures and predictability for the leniency applicant. While “the regulation on fines and leniency” from 2015 specifies the procedures, an active dissemination and communication strategy is key to attract applications.27 European Commission. “Commission Staff Working Document. Albania 2016 Report” (European Commission: Brussels, 2016)28 in compliance with the European Union acquis requirements29 World Bank Group. “Western Balkans: Regional Economic Integration Issues Notes”. (Washington DC: World Bank, 2017)

36

State Aid Commission did not receive a single notification from local authorities. Improving the independence of the State Aid Commission and increasing the number and level of expertise of the staff of the State Aid Sector could have a significant impact on the enforcement record on state aid decisions. Equally, the ACA proactively issues opinions on how to design regulations, concessions, procurement processes in accordance with competition principles. Going forward, the Government could ensure that recommendations are formally addressed by sector regulators and ministries (e.g. in the electricity sector).

Priority reform actions for discussion include:

Strengthening of the capacities of dedicated anticartel enforcement officials and case handlers to detect and prosecute anti-competitive practices

Enhancement of ACA investigative powers to break up international cartels, actively promoting its leniency program by developing a dissemination and communication campaign for Albania’s leniency programs for cartel members that come forward to expose illegal agreements

Creation of a task force to assess the current weaknesses in the performance of the State Aid Commission, including a review of possible measures to strengthen independence and to increase institutional capacity to block competition-distorting state aid

Ensure that ACA recommendations are formally addressed by sector regulators and ministries (e.g. in the electricity sector), for example by amending the Competition Law30 to include a provision that requires formal response from sector regulators and ministries to recommendations of the ACA on how to design regulations, concessions, procurement processes in accordance with competition principles

B. Infrastructure for growth

Albania has one of the largest infrastructure gaps in the region – public investment has a role to play in promoting the development of the economy. For instance, to unlock tourism potential, Albania’s untapped regions needs a to be better connected to the rest of the country and abroad. Water and waste management need to be brought to the standard expected by international tourism – and that Albania’s citizen deserve. Albania has significant potential to strengthen its position as trade gateway for the wider Western Balkans region, including landlocked Kosovo and FYR Macedonia, by improving the infrastructure and the management of its port facilities at Durres and strengthening inland links with Tirana and the wider region. Strong export infrastructure is key to enabling the development of a domestic manufacturing base integrated in global value chains.31 Albania’s Information and Communications Technology (ICT) infrastructure also needs to be further upgraded. Initiatives to strengthen regional connectivity, such as through the Berlin process, need to be supported.

However, as prerequisite for the scale-up of public investment, Albania needs to further strengthen Public Investment Management (PIM) to ensure cost-effective public investment and to safeguard fiscal sustainability. As identified in the 2016 Public Expenditure and Financial Accountability (PEFA) Assessment for Albania, public investment management is a major challenge. Weak links between public 30 Art. 24 (“Duties and Competences of the Commission”) and Art. 70 (“Role of the Authority with regard to regulation and regulatory reform”)31 Following completion of the TAP, the wider use of natural gas as energy source for Albania has the potential to significantly diversify Albania’s energy supply, increase reliability and reduce costs. This is discussed further in the dedicated section on energy reform in this note.

37

investment and sector strategies, weaknesses in project appraisal and selection, combined with incomplete data and poor monitoring systems undermine the effectiveness and efficiency of public investment management decisions. In addition, sustainable conservation of the new infrastructure – especially in roads - requires rebalancing spending toward maintenance and rehabilitation (2015 World Bank SCD). Under-spending on road maintenance exacerbates the rate of deterioration, hastening failure of the pavement and engendering a need for reconstruction that could have been avoided. As the government addresses the need for improving infrastructure within the budgetary limits, it also needs to improve monitoring and reporting of fiscal risks arising from extrabudgetary activities.

Albania currently faces a large public investment gap…

… but a stronger PIM framework is a pre-requisite for a scale-up of public investment

Source: IMF Report – Public Infrastructure in the the Western Balkans (2018)

Source: IMF Report – Public Infrastructure in the the Western Balkans (2018)

Priority reform actions for discussion include:

Implementation of a budgeting process that ensures appropriate resource allocation between new public investment projects, the maintenance of existing infrastructure and other existing expenditure commitments.

Development of a transparent dedicated updated infrastructure action plan, adequately sequenced to follow (i) PIM and Public Private Partnerships (PPP) framework reforms, (ii) a comprehensive analysis of infrastructure needs and priorities and (iii) funding allocations aligned with Albania’s available fiscal space.

Implementation of a performance improvement strategy for local water and waste management facilities, including by consolidating small and inefficient local operators as well as by developing performance-improvement plans (including revenue collection targets) for operators in fiscal distress.

38

C. Leveraging trade to access larger markets

Given the small size of Albania’s home market, an outward-orientation of the economy is crucial to offer businesses in Albania a sufficiently large customer and supplier base. While tariffs have been significantly reduced and Albania is at 24 th place in the 2018 World Bank Doing Business ranking, complex non-tariff barriers continue to restrict trade. While Albania has seen solid growth in exports of goods and services, it did so from a small export base. Moreover, Albania’s export basket, which is composed of minerals, fuels, and electricity, has remained relatively unsophisticated with respect to embedded human capital. Its export destinations have become less concentrated since the 1990s, however the European Union – and in particular Italy - remains Albania’s main trading partner. 32 This export performance partly reflects the low sophistication of Albania’s current producer base, which can only develop gradually. However, it also reflects still complex border clearance processes and lack of mutual recognitions of trade related documents and certifications across borders. It is crucial to enhance capacity of related agencies for risk based border inspections. Business-friendly trade policy and facilitation arrangements are key to allow Albanian companies to grow, develop economies of scale by accessing markets beyond Albania and to integrate in global value chains. It is estimated that, for the whole Western Balkans region, annual connectivity cost savings of about 1% of regional GDP would accrue if logistics costs were brought down to comparable EU levels (Regional Balkans Infrastructure Study (REBIS) 2015).

Priority reform actions for discussion include:

Implementation of the Multi-Annual Action Plan (MAP) for a Regional Economic Area in the Western Balkans, including (i) fully operationalize the certified-trader programs as Authorized Economic Operators (AEO) status33, (ii) improve joint risk management, border controls and one-stop shop border controls and (iii) review domestic regulation in trade in services.34

Capacity improvement of Sanitary and Phyto-Sanitary35 (SPS) agencies customs for border controls and data exchange and assist in reducing the number of documents required by SPS border agencies.

Establishment of an access to markets committee consisting of all public agencies involved in trade and private sector representatives for policy coordination on trade related issues and establish a formal feedback mechanism with the private sector.

Implementation of the National Single Window (NSW) to facilitate trade infrastructure with the key objective to discharge all the regulatory obligations related to import or export with relevant authorities of the country. These authorities include Customs, Food and Drugs, Quarantine, Ministry

32 However, trade with the Western Balkans neighbors has increased four-fold since the Central European Free Trade Agreement (CEFTA) was signed in 2006.33 An Authorized Economic Operator (AEO) is a company which, by satisfying certain criteria, is considered to be trustworthy by Customs and other border inspection authorities and therefore entitled to a number of simplified processes and procedures (benefits) as a reward for their long-standing high compliance levels.34 The MAP builds on the CEFTA Additional Protocol 5 on Trade Facilitation, which has been agreed between the CEFTA parties, has been ratified to date by three parties, and is expected to be ratified by all by the end of 2018. The CEFTA AP5 aims to foster regional integration of trade procedures, prescribing, among others, collaboration on risk management, common customs procedures and harmonized documentation requirements, exchange of data and other provisions.35 This concerns the application of food safety and animal and plant health regulations.

39

of Trade and other agencies that are involved in the import/export clearance process and border control.

Trade costs remain significant in Albania… … and logistic performance is weak across all dimensions

overall LPI scoreCustoms

Infrastructure

International shipmentsLogistics quality and competence

Tracking and tracing

Timeliness

0

5

EU28

Source: World Bank Doing Business 2017 Source: Logistic Performance Index 2016

D. Attracting and retaining private investment

While Albania’s overall FDI performance has been strong in recent years, it has had limited success in attracting FDI that establishes new companies in Albania (so-called greenfield investment). The majority of Greenfield investments in Albania have been market-seeking (driven by an investor’s intention to establish production facilities in the host economy, with the ultimate intent of supplying goods and services to the host country’s market), while less than 1 percent has been efficiency-seeking (when investors seek to increase cost-efficiency of production, by taking advantage of various location-specific competitive factors, such as knowledgeable workforce, supply of key inputs, and like transport or logistics). This is important because efficiency-seeking investment is export-oriented and has the potential to help Albania improve the productivity of its workforce and connect domestic suppliers to Global Value Chains. Between 2011 and 2016, 17 percent of Greenfield investment projects were in transport and logistics services, followed by 13 percent each in financial services and business services. Since FDI is a key source of external financing, can introduce advanced know-how into the country (the underlying binding growth constraint identified by the Harvard CGI study of Albania in 2017) and link Albania to Global Value Chains, it is key that a favorable investment environment for foreign investors is created. Albania needs a broad investor base, including FDI with strong integration with the rest of the economy.

The institutional provisions that protect both domestic and foreign investors need to be further strengthened. The current strategic investment law is in place only temporarily, creating uncertainty for investors as to the legal framework that will follow. The foreign investment law needs to be aligned and, as far as possible, consolidated with sectoral legislation. The rights of domestic and foreign investors (including guarantees against the most important types of political risks i.e. expropriation, guarantee of free conversion and transfer of currency, adverse regulatory changes and breach of contract) need to be explicitly defined, creating fair and predictable conditions for all. For all these reasons, a new unified investment law for Albania is needed. In addition, an effective grievance redress mechanism needs to be put in place to ensure that investor grievances are systematically addressed by the relevant Government

40

agencies and to ensure that conflicts can be resolved before investors need to resort to the court system or international investor-State arbitration. Albania needs to move forward and settle the implementation details for these institutional changes that have been under discussion for many years.

Investor outreach and promotion is an important tool for attracting investment – Albania needs to use this tool more effectively. The Albanian Investment Development Agency (AIDA) has been mandated to lead this task, but a multitude of Government agencies are now involved and coordination of initiatives needs to be improved. The outreach strategy needs a private-sector organizational mindset, shifting from general image-building into providing information and consultancy services tailored to foreign companies who should be treated as clients. Investors need access to sector-specific data repositories (for instance a database of land plots with clear property rights that could be used for investment development).

While Albania’s overall FDI performance has been strong, the number of greenfield projects has been limited…

… Albania needs to create the right environment to attract international investors

Source: Financial Times FDI Markets Source: MIGA-EIU Political Risk Survey 2013 (Approximated 2016)

Priority reform actions for discussion include:

Adoption of a new unified investment law which streamlines the multitude of existing investment legislation and provides clear, fair and predictable conditions for all investors (foreign and domestic)

Establishment of an effective mechanism to resolve investor grievances and retain investment, including grievance tracking procedures and a systemic investor grievance management system.

Creation of a task force to recommend measures to strengthen of the country’s investor outreach and promotion framework, including effective sector targeting, investor aftercare, appropriate inter-agency coordination mechanisms and development of a sector specific data and knowledge repository to enable informed investment outreach.

E. Harnessing the potential of financial markets

Domestic private sector credit depth is low – preventing Albania’s successful businesses from growing and creating jobs. Credit to the domestic private sector represents only 35 percent of GDP compared to above 50 percent in regional peers, reflecting very low credit-to-deposit ratios at Albania’s

41

banks. Micro, small and medium sized enterprises (MSMEs) – the backbone of the Albanian economy – face significant constraints in accessing finance, with only 17 percent of MSMEs believing that there are no obstacles to obtaining finance, a number significantly lower than in other comparable economies. Likely factors behind the low rate at which banks transform deposits into loans include (i) limited credit supply given a low risk appetite by banks and non-performing loans (NPLs) that burden bank balance sheets as well as (ii) limited eligible credit demand given a lack of bankable projects, reflecting limited economic opportunities, (in some cases) over-leveraged corporates as well as wide-spread informality. However, this reluctance to lend also reflects ongoing concerns with loan repayment behavior as well as the ability to enforce loan contracts. The Albanian authorities have undertaken important reforms to improve the legal framework that are expected to support resolution of NPLs flow in the future and, as result, lower the risks in the system and stimulate lending. The measures include the new insolvency law, amendments to the civil code, amendments to the code of civil procedure, and amendments to the private bailiff service law – all of which are crucial to allow bank balance sheets to recover and to reduce risk perceptions on new lending. However, further follow-up action is needed.

Besides the banking system, Albania needs to nurture a broader and more diversified ecosystem of financial services. Banks in Albania make up 90% of the total assets of the financial system. Activity of microfinance entities, as well as factoring and leasing companies, comprises only 3.2% of the assets, while insurance and private pension funds occupy a negligible 2%. Despite the rapid growth in the recent years of investment funds (at 4.6% of system assets) which invest predominantly in government domestic securities, the rest of capital market activities are almost non-existent. There is a need for Albania to diversify its financial system by stimulating the development of lending to non-bank financial institutions (NBFIs), developing the capital markets, starting with the secondary market of government securities, and expanding the insurance and private pension sectors.

Albania’s banks do not transform domestic savings into private sector credit …

… in part because of still significant concerns about non-performing loans

Source: Finance, Trade and Competitiveness Global Practice (World Bank) based on IMF IFS

Source: Finance, Trade and Competitiveness Global Practice (World Bank) based on National Central Bank data

Priority reform actions for discussion include:

Adoption of the bylaws under the new Insolvency Law, improvements in the Private Bailiff Fees instructions, and approval of the out of court voluntary NPLs restructuring framework.

42

Implementation of measures to increase access to credit for Albania’s enterprises, in particular MSMEs, including among others (i) creation of a MSME development coordination structure for the multiple line Ministries and Government agencies whose mandate touches on enterprise growth, (ii) development of programs for early stage financing and risk-sharing facilities for MSMEs, (iii) the promotion of digital financial transactions and digitalization of the economy, (iv) enhancing financial education activities and strengthening financial consumer protection, and (v) strengthening financial infrastructure including the establishment of a credit bureau36 as well as modernizing the secured transaction framework.37

Actions to develop capital markets, including (i) upgrading the securities market legislation framework and improve capacities of the capital markets regulator and (ii) developing government bond markets.

F. Unlocking the land market

Unresolved policy, legal and institutional issues are the key impediments to secure property rights. Although Albania made rapid progress in post-1991 land reform and privatization programs, significant impediments remain for secure property rights and an efficient land market. A poor property registration system (more than 80 percent of registrations still occur manually) has resulted in a flood of competing claims for land and unresolved court cases. Almost 70 percent of all civil cases pending in Albanian courts and a large number of cases at the European Court of Human Rights involve land disputes. Properties in the highly sought-after South of Albania have in many cases never been fully registered, but face multiple competing claims. The land allocation/privatization process which began in the 1990s remains incomplete. There are too many institutions responsible for allocating and managing immovable property, which has led to gaps and overlaps in responsibility.

The dysfunctional land market has far-ranging costs for economic growth and job creation While unclear property rights on land represent a crosscutting issue in all sectors, the absence of an efficient land market is most felt in agriculture – where land fragmentation is a significant constraint on the development of economies of scale and unclear ownership stifles incentives to invest in land - and tourism – where large plots with clear property rights are needed to attract new investment projects. Informality is widespread, which impedes the collection of property taxes.38 Because land titles are mistrusted, they limit the usefulness of property as collateral to access credit and fund investment.

Priority reform actions for discussion include:

Completion of consolidation of Albania’s property institutions (IPRO, Agency for Legalization, Urbanization and Integration of Informal Zones/Constructions (ALUIZNI), the Property Treatment Agency and Agency of Inventory and Transfer of Public Properties (AITPP)) into a single entity.

Enactment of two new land laws to replace the current 15 laws: one to cover and conclude the existing transitional land allocation activities, such as restitution/compensation, issuing AMTP

36 EBRD is working with the BoA and AAB on a new privately owned credit bureau which will also incorporate info beyond bank data.37 A more detailed set of reforms will be shared with the authorities in May 2018 following the a ‘Finance for Growth for Albania’ assessment which the WB team conducted in mid-March 2018. The report will provide an overview of financial intermediation for the corporate segment in Albania as well as a set of detailed recommendations on how to improve access and usage of financial services, in particular for MSMEs.38 There are an estimate of 400,000 informal buildings in Albania.

43

(agricultural land allocation document) and legalization; and another to set up the permanent agency and services for the future.

Development of a reliable property registry, including (i) full registration of land and (ii) updating IPRO records, moving to digital data and integrated land administration services.

Establishment of a training agency for notaries (National Training Centers for Notaries) to ensure knowledge of the legislative framework on property registration.

Development of a regulatory framework (decrees and/or ministerial orders) defining certification procedures for local offices staff of Immovable Property Registration Offices (IPRO) to guarantee registration of joint ownership for women.

Property rights in Albania are among the weakest in the world

Source: International Property Rights Index, https://www.internationalpropertyrightsindex.org/full-report

G. Providing reliable electricity access

While Albania has made important progress on energy reform, access to electricity remains unreliable and expensive. An unreliable power grid remains a key business constraint in many economic sectors, as production disruptions linked to power outages dramatically increase business operating costs. Albania ranks at 157th place (out of 190 countries) in the World Bank Doing Business survey – right ahead of Barabados, Swaziland and Guinea and behind The Gambia, Zambia and Mali. Frequent power outages39 reflect under-investment in Albania’s transmission and distribution system, which in turn can be traced back to underlying governance, competition and financial challenges in the sector. The state-owned power generation company (KESH), the transmission company (OST) and the distribution company (OSHEE) carry arrears against each other, leading to poor cash flow predictability and inefficient debt management. Combined with the frequent need for expensive electricity imports to cover shortfalls from domestic hydropower production during droughts, large transmission and distribution electricity as well

39 The reliability of supply is improved compared with previous years. The 2017 DB report shows improvement in number and duration of interruptions (SAIFi and SAIDI) thanks to ordinary maintenance and new investment in the electricity infrastructure during last three years.

44

as low electricity bill payment compliance, this adds to the energy sector’s continued financial difficulties which prevent adequate upgrading of its infrastructure.

Priority reform actions for discussion include:

Settlement of outstanding arrears in the electricity sector according to the updated Energy Sector Financial Recovery Plan

Implementation of the power sector reform consisting of (i) full sector unbundling, (ii) operationalization of the Albania Power Exchange, (iii) facilitation of the settlement of transactions between power producers and retailers and (iv) deregulation in retail markets with a priority on non-household medium and low voltage users.

Development of an action plan for diversification of Albania’s energy sector and for reducing medium-term exposure to droughts, including gasification of the economy (building on the Gas Master Plan) and use of renewable energy.

H. Ensuring effective contract enforcement and a reliable administration

Albania urgently needs to strengthen its judicial system, which is a key precondition for opening EU accession negotiations and crucial for ensuring effective contract enforcement for businesses. High contract enforcement costs, a lengthy court process and unreliable judgments can significantly increase the cost of running an enterprise, deterring job creation in the first place. In Albania, the cost of contract enforcement remains high - in particular reflecting high attorney fees (DB 2018). While lawyers are free to negotiate their fees through agreements with their clients, likely factors driving up fees include (i) lack of minimum VAT registration threshold for lawyers, (ii) the ability to make agreements on fees based on quota litis (where the client agrees to pay a share of the results upon the conclusion of the matter) and (iii) high bar association fees (relative to per capita income). While there are 8700 registered attorneys in Albania, only 2200 are active (2016) – suggesting barriers to entry into the sector. 40 Furthermore, the quality of court proceedings remains below regional peers. Overall, Albania’s cross-sector justice strategy 2015-20 needs to be fully implemented.

Priority reform actions for discussion include:

Development of streamlined court proceedings. including (i) establishment of a fast-track procedure for small claims and (ii) electronic case management tools for judges and lawyers.

Expansion of alternative dispute resolution (ADR) mechanisms, including fiduciary incentives 41 for out-of-court mediation or conciliation.

Albania needs to continue its drive to fight corruption, increasing the reliability of the courts and the administration while lowering effective costs for businesses. Albania is at 91st place (out 180 countries) in the 2017 Corruption Perceptions Index of Transparency International. The recommendations of the UN Convention against Corruption need to be fully implemented.

Priority reform actions for discussion include:

Full operationalization of the new anti-corruption investigation structure.40 http://peco.ccbe.eu/wp-content/uploads/2016/10/M-Haxhia-Albania.pdf

41 For instance, if mediation or conciliation is successful, a refund of court filing fees, income tax credits or the like

45

Criminalization of all acts of corruption and ensuring effective international cooperation.

Development of a strengthened and more comprehensive asset declaration regime

I. The right fiscal policy to encourage business and preserve macro-fiscal sustainability

Macro-fiscal stability is a pre-condition for job creation and growth in Albania – Albania needs to maintain its current reform momentum and further improve fiscal policy and institutions. Albania continues to face high public debt and a very limited tax base. While a basic fiscal rule has been put in place, it needs to be further refined. Beside strengthened monitoring of public investment budgeting and PPPs (covered under the infrastructure section of this note), Albania needs to maintain its current reform momentum and further improve fiscal policy and institutions.

Albania needs to be selective in capitalizing on fiscally sound public-private partnerships (PPP) to improve service delivery. As discussed in the World Bank SCD (2015), PPPs can attract outside financing, while also bringing in market expertise and technology in finding solutions in service delivery. By bundling together infrastructure design, construction (as well as often maintenance) and linking expenditures to performance, they can contribute to efficiency gains. However, they are often complex to implement, generating off-budget fiscal risks which need to be carefully contained. Albania needs to be careful to set up a full PPP management framework that carefully weighs these considerations when selecting which projects to engage in. A strong and transparent regulatory environment governing PPPs assessment, selection and monitoring is a key prerequisite for successful PPP projects.

Priority reform actions for discussion include:42

Continued and decisive expenditure consolidation and prudent implementation of Albania’s fiscal rule, cutting inefficient operational spending and fully exploiting synergies from the merging of subnational government entities.

Measures to broaden the tax base, including by enforcing tax compliance and reviewing the cost-benefit trade-offs of current tax expenditures.

Full implementation of the Public Financial Management (PFM) Strategy 2014-2020, including full operationalization of a PPP Management framework, including publication of a comprehensive fiscal risks statement and transparent cost-benefit analysis of the current PPP project pipeline.

While paying taxes remains a key concern for businesses, addressing these concerns should not come at the cost of macro-fiscal sustainability. Paying taxes is a key cost on business, both because financially and because they absorb management time. According to the World Economic Forum Executive Opinion Survey 2018, tax rates and tax regulation are some of the most binding constraints on business in Albania (1st and 4th place respectively). According to the World Bank 2018 DB ranking, Albania has elevated statutory tax rates relative to other countries in the Western Balkans region and

42 In the medium term, the fiscal rule needs to be better defined and a fiscal council needs to be created for independent monitoring

46

leads in terms of number of separate tax payments needed per year. However, effective tax revenue collection remains low relative to GDP – reflecting low tax compliance and a growing number of special tax regimes. Albania first needs to bring down its high level of government debt and create fiscal space before adjustments in statutory tax rates should be considered. Frequently changed and unpredictable fiscal treatment, combined with ad hoc fiscal amnesties can dilute the tax base, increase evasion and harm competition.

Tackling high public debt through economic growth, fiscal consolidation as well as broadening of the tax base are pre-conditions …

… for reviewing statutory tax rates

Source: IMF World Economic Outlook (January 2018)

Source: World Bank Doing Business Ranking 2018 based on references company

Priority reform actions for discussion include:

Review of measures to reduce the administrative burden of paying taxes, carefully coordinated with efforts to strengthen the tax administration and tax compliance.

47

Synthesis Note 4: Labor SupplyHow can Albania equip its citizens with the right skills for the jobs of

tomorrow?

As one of five synthesis notes, this document aims to identify policy actions to strengthen Albania’s labor supply, equipping its workforce with the skills needed to support a rapidly changing economy and to take advantage of more and better job opportunities. Given the shift toward a global knowledge economy and Albania’s steadily improving economy that has seen growth in sectors, such as information and communication technology (ICT), agro-processing/business, and tourism in Albania, the skills demanded in Albania’s labor market are changing. To meet this changing demand, Albania’s children need schools that will effectively prepare them to join the labor market of tomorrow. Albania’s workers need access to lifelong learning opportunities to allow them to continuously upgrade their skills, to adapt and stay relevant in a fast-changing labor market and to take advantage of a growing economy. Education and work experience need to mutually reinforce each other to translate into concrete skills relevant for the workplace and the accumulation of know-how in advanced industries. Overall, a well-prepared, educated and skilled workforce may be the most important asset with which Albania can attract foreign direct investment (FDI) and enable domestic entrepreneurs. In turn, as Albania’s economy gains in complexity and attracts higher value-added industries, workers will gain additional opportunities to acquire work experience and advanced know-how.

Despite recent improvements, educational attainment and the quality of Albania’s education system remains low relative to other countries in the region. Although access to all levels of education increased, only 70 percent of the workforce have secondary education, while less than a third have tertiary education. Moreover, one in four youth are inactive and not in any form of education and training (23 percent of the age group 15–29). In terms of quality, the Performance on International Student Assessment (PISA) provides a standardized measure of cognitive skills critical for developing job relevant skills in the future. Although Albania showed consistent and substantial progress in all three subjects measured by PISA between 2009 and 2015, 2015 scores remain drastically low with about 53 percent and 50 percent of 15-year-old students scoring below basic proficiency (Level 2) in math and reading, respectively (compared to the 13 percent below proficiency average for the OECD). Additionally, private returns to education indicate low quality of the education system with unemployment rates for those with tertiary levels of education higher than for those with secondary levels of education and with vocational upper secondary education.

49

This note synthesizes key policy options to strengthen Albania’s skills base through two complementary approaches: strengthening Albania’s education system and leveraging the skills of Albania’s large diaspora.

Low education outcomes contribute to Albania’s skills gap, which is holding back the economy and preventing the creation of more and better jobs. A 2017 study by the Center for International Development (CID) identified a lack of productive know-how as a key constraint for Albania’s economy. According to findings from the Skills Towards Employment and Productivity (STEP) Employer survey43 for Albania, which draws from a nationally representative sample of 600 firms, many firms that tried to hire workers in the past three years (51 percent of all firms) met with difficulties in recruitment because job applicants lacked skills, and because there were no or few applicants. These “skills constrained” firms, representing about one-third of all firms in the survey, find that job applicants lack the job-specific technical skills as well as the interpersonal skills necessary to be effective on the job, especially for higher skilled occupations. At least as perceived by employers, skills problems mostly affect young people and first-time labor market entrants; therefore, indicating quality and relevance issues in the formal education and VET systems.

This synthesis note explores two complementary approaches to tackling Albania’s skills gap. First, given the public-good nature of an educated workforce and given the constraints that households face when investing in their human capital, the Government of Albania has a key role to play in providing an education system that can prepare Albania’s citizens for the jobs of tomorrow. This note explores policy actions the Government can consider improving educational outcomes. Second, Albania’s large and vibrant diaspora community offers a unique opportunity for Albanians to acquire skills and know-how by learning and working in more advanced economies abroad. This note explores policy actions the Government can take to leverage this resource, to facilitate transfer of knowledge back to Albania and to mitigate the skills gap at home.44 This note draws from existing analyses of the education sector in Albania, which are summarized in Annex 2.

A. Fostering greater foundational skills development through early childhood and pre-university education45

43 The STEP Employer survey provides new and important insights into measuring the specific set of skills (see Annex 3 of this note) sought by employers and the report adds value to other ongoing efforts in Albania (i.e. by the Institute of Statistics in Albania [INSTAT], United Nations Development Program [UNDP], and the National Employment Services [NES]).44 While FDI can also be a catalyst for the development of skills and know-how in the domestic economy, policies specifically designed to attract FDI are covered in a separate note on how to strengthen labor demand and Albania’s business environment. 45 This section draws from World Bank Public Finance Review (2014), PISA 2012 analysis, and SABER ECD Country Report for Albania (2014)

50

A strong formal education during childhood and early adulthood establishes the foundational cognitive and socioeconomic skills needed to successfully integrate into the labor market and to take advantage of high-skill job opportunities. Skills development starts at birth and skills take a long time to build through early childhood development, primary and secondary education, and postsecondary skills development. A broad mix of cognitive, socioemotional and technical skills are required by employers. Cognitive skills include literacy and numeracy, but can also include competencies like critical thinking and problem-solving. Socioemotional skills capture one’s ability to interact with others (interpersonal skills), determination, and focus on getting a job done. While it is important to note that educational attainment is not necessarily a proxy for these skills, improving the quality and relevance of the education system is generally seen as paramount to their development. In turn, these foundational skills open the door to employment and the development of technical skills (which capture one’s ability to perform technical tasks that are specific to an occupation, i.e. work performed as a plumber or engineer).

Albania needs to reallocate education sector spending to where it is most needed and, as fiscal space becomes available, scale up budget allocations for the sector overall. Government spending on education for Albania at 12.1 percent of total public expenditure is comparable to both the average for the OECD and Europe and Central Asia (12.4 and 12.1 percent). Nevertheless, Albania’s education spending is low considering that 25 percent of its population is below 19 years old (2015).46,47 While increased funding to education could increase access to valuable educational resources, improving the efficiency and equity of current public spending in the sector is just as critical. Currently, s tudent-teacher ratios (STR) vary by geographic location with urban areas having high STRs and rural areas having low STRs in contrast. Moreover, complex governance structure hampers the efficiency and equity in education, and results in limited accountability of local governments’. Albania could consider increasing public spending on education as fiscal space opens over the medium term, while in the short term seeking efficiency gains in the sector, such as redeploying fiscal savings from declining student numbers in higher grades to preschool; improving the management and governance of the education sector to increase transparency and accountability in the use of resources; and, introducing per capita financing (PCF) to fund pre-university education.

Albania

Austria

Czech

Republic

Estonia

Europe & Centra

l Asia

Kosovo

Latvia

Lithuania

OECD members

Poland

Slovak Republic

Slovenia0.01.02.03.04.05.06.07.08.0

0.02.04.06.08.010.012.014.016.018.020.0

Expenditure on education as % of total government expenditure (%)Government expenditure on education, total (% of GDP)

46In 2013, public expenditures on education was 3.5 percent of GDP, lower than the EU-27 average of 5.1 percent (in 2014) or the ECA average of 4.6 percent. 47Kosovo which also has a high share of young population size spends about 14 percent.

51

Source: UNESCO UIS (2018)Note: Data is based on 2013, which is latest data available for comparators included, except for Kosovo for which only 2012 data is available

Education Expenditure (2013)

Steering educational resources toward the most disadvantaged students can help offset Albania’s inequitable learning outcomes. In the Albanian education system, significant inequities exist. The most disconcerting trend is the widening gap between students from the highest and lowest socioeconomic quintiles, resulting in a performance gap equivalent to about two years of schooling in both math and reading48. Further, the gap between boys and girls is nearly 60 points in reading, while the urban-rural gap is nearly 30 points in science, equivalent to nearly one year of schooling. As efforts to increase efficiency and scale up education spending are made, more resources should be targeted to benefit boys, students from disadvantaged backgrounds, and those who live in rural areas. Rural schools may need extra school resources to make up for the gap in students’ socioeconomic backgrounds, while incentives should be aligned to ensure that the best teachers are matched with the most difficult students. Related to this, the existence of overlapping catchment areas for schools and the growing number of small schools present opportunities to consider school rezoning options in a way that makes schools less stratified and promotes more equitable outcomes.

Improving the coverage and quality of early childhood education and care (ECEC)49 has the potential to level the playing field for disadvantaged students in Albania. Early childhood (ages 0-6) is a critical period in a child’s physical, cognitive, linguistic, and socioemotional development. Over the longer term, ECEC interventions are linked with higher educational attainment, post-school productivity, and income. ECEC programs have not only a high cost-benefit ratio, but also a higher rate of return for vulnerable groups and interventions aimed at older children and adults50. It is also worth noting that greater maternal labor force participation is a byproduct of ECEC, which is especially important for Albania as women are more likely to become unemployed due to family responsibilities (40 percent versus 10 percent of men). Nevertheless, the low ECEC coverage and high rate of functional illiteracy in Albania (52 percent51) indicates that many current 15-year-olds likely did not master these emergent literacy skills prior o entering primary school.52 The Government is considering introducing grade 0 for inclusion in compulsory education to address issues of inclusiveness and is seeking to improve the curricula and training for teachers. Such efforts are noteworthy, but a well-coordinated strategy across all stakeholders (central and municipal governments, schools, parents, and international partners) will be required to ensure that vulnerable groups, in particular boys and students of low socioeconomic status, are targeted for enrollment and that quality assurances are in place to ensure the “preprimary education effect” is attained in Albania.

To strengthen educational outcomes in primary and secondary schools, the quality of teaching needs to be strengthened. Leading researchers have determined that teacher quality is the main school-

48Based on PISA 2012 analysis49 In Albania, ECEC or pre-primary education includes kindergartens and a preparatory class (grade 0). It serves children aged 3-6, but it is not compulsory. 50 The potential return rate from high-quality ECD programs targeting vulnerable groups is between 7 percent and 16 percent, annually.51 PISA 2012 data.52 Results from PISA 2009 show that in nearly all OECD countries, 15-year-old students who had attended some preprimary school outperformed students who had not, after controlling for socioeconomic background (OECD 2011). Students who had attended preprimary school scored an average of 33 points higher on the PISA reading assessment than those who had not. For Albanian students, the advantage of preprimary school was only 18 points, lower than even non-OECD countries, such as Panama (25 points), Thailand (35 points), and Kyrgyzstan (47 points).

52

based predictor of student achievement.53Albania has recently taken important steps to improve the training and qualifications framework for teacher candidates, including stricter entry criteria for pre-service teacher training programs and the requirement of a Master degree for teaching. While the requirements for pre-service teacher training have become stricter, the content of pre-service training has not improved much. Moreover, the system does not provide sufficient and relevant in-service teacher training that would provide teachers with skills to teach new curriculum. Recent evidence suggests that peer mentoring programs paired with classroom observations, teachers’ professional development focusing on improving classroom effectiveness, and feedback systems for teachers could make the difference in strengthening classroom management techniques and promoting relevant pedagogic techniques. Recruiting the best candidates into the teaching profession and providing access to continuing, high quality professional development will require greater resources and technical support.

Albania lacks robust and reliable education data to inform policy decisions. According to the OECD, the PISA 2015 household data for Albania are not reliable. Unfortunately, this was also the case in 2012, which greatly constrains the country’s ability to apply PISA data analysis to policy reform decisions. Mechanisms to ensure the quality of data collection are critical for evidence-based policy making to take place. Moreover, Albania has three national exams in Grade 5, Grade 9, and the Matura exam in Grade 12. However, both the Grade 9 and Matura exams are exit exams and are not necessarily used to gauge systemic quality issues. Albania has taken a positive step toward measuring education quality by signing up to participate in TIMSS 2019, albeit for 4th grade only. Introducing more assessments early on in the educational process to measure school readiness, such as Early Grade Reading Assessment (EGRA) or Measuring Early Learning Quality and Outcomes (MELQO), and participating fully and consistently in international assessments, such as TIMSS and PISA could help identify drivers of learning and inform policy reforms.

Priority reform actions for discussion include:

Adoption of national education budget optimization strategy, including (i) school and classroom optimization analysis to seek efficiency gains in light of demographic decline, (ii) redeployment of additional fiscal resources to currently under-funded parts of the education sector (such as pre-school education, rural and poor areas) and (iii) introducing transparent per capita financing (PCF) tailored to levels of pre-university education.

Preparation of a report proposing recommendations to strengthen early childhood education and care (ECEC) effectiveness, including measures to improve quality and equity (targeting of vulnerable children).

Introduction of comprehensive pre-service and in-service teacher trainings, including (i) peer mentoring programs and (ii) instruments to track teacher effectiveness. 54

Introduction of robust and reliable student assessment tool and mechanism to improve the availability and quality of data collection.55

Increase of funding for public education over the medium-term, depending on available fiscal space.

53Hanushek and Woessmann. (2007).54 Possibly adapting the Classroom Assessment Scoring System or other tailored instruments55 For student learning outcomes and school readiness, these could include EGRA, MELQO, TIMMS and PISA.

53

B. Fostering job-relevant skills through Vocational Education and Training (VET) System56

Albania has made recent improvements to its vocational education and workforce training systems in terms of human capital development and employment, but more is needed. The National Employment and Skills Strategy (NESS) 2014-2020, has set the stage for comprehensive reforms to promote quality jobs and skills opportunities for all Albanian women and men throughout their lifecycle. The four strategic priority areas include: (a) foster decent job opportunities through effective labor market, (b) offer quality vocational education and training to youth and adults, (c) promote social inclusion and territorial cohesion, and (d) strengthen the governance of the labor market and qualification systems. According to a 2016 progress report on NESS implementation, positive impacts have been made since its inception: investments in the vocational education sector doubled; enrollment and participation rates in vocational education and vocational training have increased by approximately 16 percent; the number of trained individuals increased by 25 percent; and young female unemployment and young male unemployment, both declined by 7 percent and 2.7 percent, respectively (compared with 2015).However, more needs to be done to strengthen the legal framework under which employment and vocational education operates, ensure quality and relevance of the vocational education and training, and improve labor market inclusiveness.

While the approved laws on VET (2017) and on Craftsmanship (in 2016) have outlined the broad policy agenda and have contributed to clarifying the role and responsibilities among institutions, the slow pace of drafting and approving bylaws is hindering the implementations of envisaged reforms. The VET law determines the main principles in relation to the VET provision, governance, financing and accreditation hence the development of the by-laws would enable implementation of new reforms or enhancement of existing ones. The decision to merge the upper secondary vocational education (VET schools) and the adult training (or workforce development programs) under the Ministry of Finance and Economy is a positive step towards ensuring closer ties between labor policies and training provision – though staffing for the resulting merged entity needs be increased to reflect the size of its responsibilities and to avoid a loss of capacity. And, further clarifying the roles and responsibilities of the future National Skills and Employment Agency (NESA) vis a vis the National Agency for Vocational Education and Training and Qualifications (NAVETQ), and improving the coordination with higher education institutions (for post-secondary programs) and training providers outside of the formal education will be critical. Similarly, the Law on Crafts, which envisages the setting up of a Crafts Chamber and a dual training (apprenticeship) system for crafts trades would contribute to improving the quality and innovative mechanisms for work-place based learning scheme in the vocational education system.

Strengthening the external quality assurance mechanisms and determining the model for accreditation of public and private providers and setting up the inspection of public VET providers would contribute to increased quality and relevance of training provision. As reported in NESS Progress Report 2018, there has been some progress in defining the framework for internal quality assurance and supporting providers to establish internal quality systems. In 2016, the Government developed the guidelines for accreditation of public and private training providers, however, the by-law is not yet approved due to the need to adjust it to the provisions of the VET role and the clarification of roles of NESA and NAVETQ. Ensuring that learning leads to satisfactory outcomes requires performance monitoring and measurement of quality and outcomes. As such, a quality assurance and accreditation mechanism with regular renewals would better capture institutional ability to adapt to technological change and shifts in the labor market, a key factor in maintaining quality training. In the short term, the Government should finalize and approve the by-laws and guidelines regulating this matter, while at the

56 This section draws exclusively from Government’s strategic documents, such as the NESS 2014-2020 and the Progress Reports from 2015 and 2016. It also draws from the forthcoming STEP Report for Albania.

54

same time, making sure both human and financial resources are made available to perform these new responsibilities.

Similarly, the revision of the Law on the Albanian Qualification Framework (AQF) has been sluggish, affecting the process of curricula revision and cataloguing at national level (and cross-referencing with European Qualifications Framework) the qualifications and competences. NAVETQ, represented in the AQF Task Force, has led the work in revising the law and has updated the List of National Vocational Qualifications for AQF levels 2-557 in 2016. However, the amended Law is pending approval. The establishment of the AQF is only the start of an ongoing process of populating the framework with the relevant list of qualifications, and developing and validating the standards and curriculum with the input from employers. The completion of the AQF Law and secondary legislation would better regulate the processes that assure the quality of qualification standards, assessment, and certification forming the basis for trusted qualifications and further improve the process of curricula design in education and training – with involvement of private sector and social partners. It would also allow for recognition of Albanian VET nationally and internationally (when qualifications are cross-reference with the European Qualifications Framework), thus leading to improvements in the employability (by improved signaling) and labor mobility of VET graduates.

Diversification of vocational trainings to include short and long-term programs and optimization of the network of public VET providers and post-secondary VET provisioning is needed. The review of the profiles and their linkages with labor market has been completed and several profiles closed. At the same time, the establishment of the Multi-Functional Centers (MFCs) – which brings together VET schools and Vocational Training Centers (which serve the adult population) – will contribute to improved links with private sector. In the short term, the tracing system, which follows up on the employability of individuals and was just made operational in one of the MFCs, will provide important feedback to the challenge of quality assurance of VET and labor market signals. Such system should be expanded to cover the whole system. It is also necessary to formulate new approaches to the planning, management, funding and evaluation of publicly financed VET provision. The mechanisms to be adopted will aim to achieve a funding system based on high-quality provision, which is responsive, cost-effective and accountable. In addition, establishing sector skills committees that include representation from the private sector can help to identify key qualifications and enhance the curricula to better meet the needs of priority sectors.

Moreover, the current delivery modality of vocational training (class-based) does not promote work-based learning. One reason why some employers are critical about the VET system is that it does not equip trainees with practical skills. With the exception of a few donor-funded pilot apprenticeship programs, VET schools in Albania offer school-based learning only and do not promote trainees’ exposure to work experience. At the same time, private sector associations are weak and not well organized to partner with the VET providers to promote work-based learning. Fostering job-relevant skills development can be achieved through upscaling successful models of work-based learning.

The current adult training programs are limited in scale, diversity and do not respond to the needs of the labor market.58The provision is mainly public, through the 10 Vocational Training Centers (VTCs) that operate under MoFE, while there also private providers. Despite increased budgets to VTCs in the past three years, improvements in relevance of trainings (curricula), infrastructure, or staff are limited. An assessment of training providers shows that in general, the quality of training by private providers is hampered by similar challenges of low quality and relevance. Experience has shown

57

58Please refer to Note 2 on Labor Market Regulations for a review of workforce development programs provided through VTCs.

55

building an effective adult education system requires a shift from government-defined programs towards a well-regulated market of public and private providers that deliver training services for both working and unemployed adults. Encouraging the growth of private training institutions and the provision of practical training in enterprises will be important. Given that the majority of firms in Albania are small- to medium size, this may not be achieved in the short-term. However, as economy develops and labor market becomes more dynamic and formal, enhancing the roles of the private sector in provision of training is a critical strategy in increasing access and quality of VET and making it fiscally sustainable 59. Therefore, as noted above, building the legal foundations and ensuring sufficient resources for performing such functions would be critical.

At the same time, to more effectively deliver education and training to the adult population, the Government could introduce a performance-based funding model which could help to enhance the quality and diversify the offer. Moving to a performance-based model for funding for training providers can demonstrate good results and know-how in training programs and strong linkages with the firms in the private sector. This could allow the government to tap into promising providers. The approach could be piloted in sectors of growth. As noted above, to maintain quality standards, accreditation of providers and programs and also the external inspection is strongly advised. Such initiative in Albania should be carried out on a pilot basis and accompanied by a well-designed impact evaluation.

The social inclusion of marginalized groups remains a key challenge in the NES strategy. To date, social inclusion remains an issue regarding labor market outcomes. Minority groups, such as Roma and other vulnerable groups, such as the disabled and rural poor, are often left behind. Youth and female unemployment is also a real issue. Although, social inclusion is a priority area of the NESS 2014-2020 strategy, implementation is lower, not only in terms of the number of actions initiated out of the total, but also in terms of its overall level of implementation. This is mainly due to this area requiring a high level of inter-ministerial (for tackling the challenges of the rural areas in terms of job creation and up-skilling of rural unemployed and most vulnerable groups) and inter-departmental (for raising synergies between employment and skills development policies, and social assistance programs) coordination for implementing the defined activities. So far, this has not had the necessary attention and needed resources allocation. Concurrently, several actions were taken by the government toward social inclusion, which include the approval of the Social Protection Strategy 2015-2020 (with a significant component on labor market inclusion of the most vulnerable groups through VET offers) and the Law on Social Enterprises; new programs for people with disabilities, for girls and women with children under the age of 18 years, and for young orphans were drafted for the first time during this period and are being implemented; finally, special attention has been paid to the inclusion of Roma in employment promotion programs and VET. However, more concerted action steps from the NESS strategy must be taken toward social inclusion in the vocational and training system. Special attention should also be devoted to making training opportunities available to rural areas. Education is a key determinant for labor market prospects for women in Albania. Demand-side constraints (household income, cultural norms) as well as supply-side constraints (the accessibility of good-quality secondary schools and tertiary education institutions) need to be addressed through appropriate instruments such as scholarships, student loans, etc.

A holistic career guidance and counselling system need to be developed in Albania. Career guidance is mainly promoted by donor programs, and is not imbedded in the internal structures. Currently, career guidance takes place informally, and there is a wide-spread perception that Albanians find work thanks to their personal and family networks, rather than through some kind of ‘rational choice’ that is underpinned

59Sondergaard, Lars, Mamtha Murthi, with Dina Abu-Ghaida, Christian Bodewig, and Jan Rutkowski, 2012. Skills, Not Just Diplomas: Managing Education for Results in Eastern Europe and Central Asia. Directions in Development. Washington, DC: World Bank.

56

by personal inclination and ability. The employment offices act mainly as job brokers rather than career guidance providers. A well-developed career guidance system can help to better articulate demand for certain profiles of training and improve the match between labor market supply and demand by better matching individual talents and qualifications and the skills and qualifications demanded by employers.

Lastly, the demand for skills and existing skills gaps need to be well understood, both to improve labor market matching and to enhance productivity growth. A better understanding of the characteristics and causes of these skills gaps is needed. Albania lacks a strong and coherent labor market information system (LMIS). Information on skills that are in demand and skills that are in short supply form part of a well-functioning (LMIS). LMISs provide important feedback on the quality and relevance of education and training systems and their ability to produce both transversal skills, which are used across many different occupations, and occupation-specific skills for occupations in demand. This information can also provide important input to students and their parents as they decide on educational and professional career paths. The World Bank’s Skills Towards Employment and Productivity Employer Survey (or STEP Employer Survey) for Albania, will provide a new and important insights into measuring the broad skillsets currently valued by employers.60Additionally, participating in OECD’s Program for International Assessment of Adult Competences (PIAAC) would also be important to understand and continuously measure the skills and competences of the workforce.

Priority reform actions for discussion include:

Implementation of the Law on Vocational Education and Training (approved in 2017), including key bylaws that regulate the roles and responsibilities of NESA, NAVETQ and other players.

Enactment of the Albanian Qualifications Framework Law, enabling VET qualifications that are internationally recognized, and completion and approval of the bylaws on quality assurance of qualifications and accreditation of VET providers (both public and private)

Reinforcement of VET qualifications quality chain, starting from the labor market needs till to the awarding of a qualification, including through (i) establishment of sector skills committees that include representation from the private sector to identify curricula tailored to private sector needs, (ii) establishment of LMIS and regular surveys to identify skills gaps in the economy (STEP, PIAAC) and setting up a holistic career guidance and counseling system to assist individuals in making and implementing informed educational and occupational choices. (iii) stronger emphasis on VET models that integrate work-based learning and (iv) systematic impact evaluations for training programs.

Introduction of performance-based funding model/competitive grants program for public and private VET provisioning.

C. Building on the Foundation of Higher Education Reform

The catalytic potential of higher education reform to meet national development goals is currently underutilized in Albania. While enrollment in higher education has doubled in the last decade - currently at 61 percent (comparable to OECE average of 68 percent) – the expansion seems to have come at the expense of the quality of higher education. The unemployment rates for those with tertiary levels of education are higher than for those with secondary levels of education and with vocational upper secondary education. Additionally, inspection of Higher Education Institutions (HEIs) in 2014, found that

60 See Annex 3 for STEP Skills Framework.

57

a large share (18 out of 44 HEIs) did not adhere to the educational standards and regulations set by the Ministry, resulting in license withdrawals.

Albania has sought to improve the quality and relevance of higher education through ambitious reforms outlined in the 2015 Higher Education Law that is consistent with the goals of the Bologna Declaration. Developed based on recommendations of the White Paper (July 2014), the law foresees reforms in areas that experience has shown contribute to driving quality improvements in higher education, including (i) establishing quality assurance (accreditation) and accountability; (ii) guaranteeing autonomy of HEIs with respect to academic and financial autonomy; (iii) enhancing the efficiency and scope of financing, including diversifying sources of income; (iv) gradual move to performance-based financing. To date, the Government has advanced with implementation of quality assurance and accreditation process, establishing tool for internal assessment and external assessment. Additionally, a new performance-based financing scheme for HEIs was approved by the Government in February 2018.

Going forward, it is critical to build and continue implementing reforms foreseen in the Law. Implementation and further elaboration of the complex reform requires a continuous evidence-based process to decision-making grounded on international best practice and implementation capacity. To capitalize on achievements of other countries, the Government (or Ministry of Education) should review and analyze findings and experiences that are pertinent to Albania context and enrich the debate on reforms by using evidence-based arguments. Additionally, to ensure in HEIs can implement the reforms, the MoE should identify strengths and weaknesses of the HEIs as well as areas for improvements. This analysis would help to pinpoint to the needs of HEIs and customize assistance to ensure successful implementation. To better align the relevance of education or training provided for transition to a job, the Government should facilitate the introduction and implementation of regular graduate tracer studies. Finally, ensuring alignment of the reforms in TVET and adults learning, including alignment with the AQF is needed. The AQF should define the competences and learning outcomes expected in higher education.

Priority reform actions for discussion include:

Implementation of the Higher Education Law in consultation with HEIs and relevant stakeholders, including continued implementation of the quality assurance and financing reform.

Review and identify needs of HEIs to implement the reforms and provide continued assistance to ensure successful implementation.

Introduce and implement graduate tracer studies to improve alignment of education with needs of the labor market.

D. Tackling Albania’s migration challenge, including brain drain/Identifying sectors for skills demand assessment

Albania’s skills gap is heightened by persistent and large emigration, as Albanians continue to leave their home country in search of better job opportunities abroad. Among Albanians, the desire to emigrate is ranked 3rd (out of 160 countries) by the Gallup World Poll, which finds that the desire to emigrate increased from 36 percent of the population in 2010-2012 to 56 percent in 2013–2016. 61 Driven

61Esipova N., Ray J., Pugliese A. (2017) Number of potential migrants worldwide tops 700 million, 8 June, Gallup News, 8 June, http://news.gallup.com/poll/211883/number-potential-migrants-worldwide-tops-700-million.aspx (last

58

by high levels of unemployment and under-employment, low incomes both in formal and informal sectors (sometimes paid with delay), limited social protection and low provision of social services, Albanians have left the country to develop a sizeable diaspora abroad (relative to population). 62As emigration has been traditionally particularly pronounced among the young, dynamic and educated, this brain drain has exacerbated the domestic skills gap.

Reasons for migration (% of surveyed) Comparing the education profile of emigrants vs the general population

Source: Instat Study “Return Migration and Reintegration in Albania (2013)

Source: computations based on Barro and Lee (2013); DIOC (Database on Immigrants to OECD Countries) 2005; Education Attainment Database

While this brain drain is a challenge, it has also resulted in a large and vibrant diaspora that can be leveraged to transfer skills and know-how back to Albania. Albanians living abroad learn language skills, often gain know-how in entrepreneurship or more advanced professions and develop international social networks. Albania has the highest number of students from the Western Balkans studying in developed OECD countries. 63 They accumulate savings that can be used to start a business and transfer remittances to support members of their home communities.

accessed 26 February 2018). 62 World Bank: Returnee Migrant Vulnerability Studies in 6 Balkan countries (currently work-in-progress, March 2018); conducted as part of ASA on Supporting the Effective Reintegration Of (Roma) Returnees in the Western Balkans (P160112).63UNESCO (2017) Global Flow of Tertiary-Level Students. http://uis.unesco.org/en/uis-student-flow.

59

Diaspora (% of population)

Source: UN Population Division

Albania needs ensure that those emigrants that want to return can do so smoothly, activating the skills (and financial resources to start a business) they acquired while abroad to tackle skills shortages at home. While only few migrants report wanting to return to Albania64, return migration has become more common in recent years, reflecting improved economic prospects in Albania and tightened immigration rules abroad. Existing “Migration Counters” (that have been developed to assist these returnees with information to settle back in Albania) have seen little take-up – potentially reflecting limited outreach or poor service quality.65 Agreements on the international recognition and transfer of pension rights and educational degrees need to be expanded and made more transparent – though pension transferability agreements need to also take into account fiscal sustainability concerns.

Employment experience gained by migrants in last country of emigration (LCE) and on returning to Albania

64 A survey amongst Albanian students studying in EU countries showed that only 4 percent wished to return after finishing university, or post-university studies - Gëdeshi I., King R., Research Study into Brain Gain: Reversing Brain Drain with the Albanian Scientific Diaspora, UNDP, Tirana 2018.65 Return Migration and Reintegration in Albania (2013) -INSTAT and OMI

60

Financial situation of returnees before leaving abroad

Financial situation in last country of emigration before returning

Amount of remittances sent home by returnees in the year before returning

Source: Instat Study “Return Migration and Reintegration in Albania (2013)

While many migrants will likely not return to Albania, they can nonetheless transfer skills and know-how back to Albania through professional networks and investments. The diaspora can facilitate the transfer and adoption of foreign advanced production, management and other practices into the Albanian market. Albanians abroad can also transfer knowledge about foreign markets and contacts with foreign companies which can allow Albanian firms to make the jump into export markets. These “diaspora externalities” need to be deliberately nurtured by Albania’s Government through trade and investment show organized through Albania’s embassies.

Priority reform actions for discussion include:

Establishment of working group to review the effectiveness of “Migration Counters”, including the option to move to a stronger web-based presence to engage with return migrants interested in these services.

Development of international agreements to ensure the transferability of pension rights and recognition of educational degrees for return migrants

61

Campaign to strengthen ties of Albania’s diaspora to its home country, including embassy events for expatriates such investment and trade shows.

62

Synthesis Note 5: Labor Market monitoringHow will Albania’s job creation reform effort be monitored going

forward?

In the framework of setting up an action plan for jobs and growth, the role of comprehensive, reliable and timely labor market statistics is key to ensure its success. First, data are needed as an input for policy design implementation and evaluation and second, labor market statistics need to be developed to a useful public good informing private agents’ future economic decision, and a promotion tool to reveal the country’s advantages. On the former, to implement the jobs strategy, it would be necessary to propose (i) the data relevant for decision making, (ii) clear baseline and target indicators, (iii) and a regular evaluation and adjustment of the action plan. For each, the M&E framework needs to clarify: which agency needs to do what, when and how?

This note focuses on the first issue and discusses the data gaps which need to be an input in the design of policies and targets, but also monitor the effect of such policies. The following list of identified data gaps is not exhaustive, and should be interpreted as closely linked to the areas discussed in the previous notes. Building and maintaining data systems should carefully consider the costs and benefit trade-offs and exploit synergies to the extent possible. The Government needs to set aside sufficient funds for these activities. INSTAT needs to expand activities only to the extent that staff and budget resources allow it. The following sections discuss some of the data challenges concerning general labor market statistics, and data gaps as regard (i) skill building (ii) data needed to enhance the performance of labor market institutions (iii) migration and labor mobility

A. Strengthening general Labor market statistics

General labor market statistics dissemination standards are continuously being upgraded to comply with Eurostat practices, both as a requirement for EU accession and as a quality assurance for the public. The production of official statistics in Albania is regulated by the five-years Official Program of Statistics (OPS), which defines the priorities, topics, methods and tools, for providing economic, social, and environmental data. OPS is aligned with the national objectives and Eurostat recommendation in full respect of the statistical principles defined by the Statistics Law and the European Statistics Code of Practice. The implementation of the OPS is the responsibility of the National Statistical System (NSS) and INSTAT as the main institution of producing official statistics and the coordinator of the whole NSS. The OPS is compiled based on users’ needs and Eurostat requirements. The current OSP 2017-2021 is the third document drafted through the engagement of all the actors involved in the NSS, including the line ministries and other public institutions, users and international partners. INSTAT is the institution responsible for the dissemination of the general Labor Market statistics.

While key primary sources of statistics are available the quality concerns regarding the collected information, prevent the dissemination of sufficient detail about the type of jobs being created and remuneration. The sources for general labor market statistics are (i) the administrative data - based on the National Statistical Program and data from the Tax Authority for the calculation of wages (ii) Labor Force Survey (iii) Labor Cost Survey and (iv) Housing and Population Censuses (the last in 2011).

64

This note discusses labor market data gaps supporting private sector decisions, as well as the design of labor market policies, targets, and effects of such policies. Full harmonization with EU standards in the dissemination of general labor statistics remains the primary objective, as an obligation for the country’s accession process and as a quality assurance. Building and maintaining additional data systems supporting labor market institutions should carefully consider the costs and benefit trade-offs and exploit synergies at the extent possible.

Employment and unemployment data are based on the Labor Force Survey (LFS)66 collected on an annual basis since 2007 and quarterly basis since 2012. LFS offers a wide range of quarterly and annual information on the characteristics of the labor market and other social and demographic variables for the resident population in Albania. A recent structural assessment of the Eurostat on the LFS in Albania acknowledges several improvements concerning data collection and proposes a list of recommendations regarding full harmonization.67 Except for employment, unemployment and labor force participation disaggregated by gender and age groups, no other time series are generated for the outside users68. Quality of the data remains a constraint on further disaggregation, as the coefficient of variation of the generated series falls outside what is considered an accepted range in terms of quality. Such information would also include valuable information such as sectoral disaggregation of employment by NACE 2, wages and tracking of changes in the skills content (manual, routine, cognitive) of different occupations.

To make the data user friendly, data discrepancies the between surveys and administrative sources as well as between different surveys, need to be constantly assessed and explained and the changes in methodologies should accompany the data. Besides the surveys, general labor market statistics are computed using administrative data collected through the National employment services. A comparison between the same indicators created through these sources, points out to differences which can be explained by a limited registration with National Employment Services, as well as large informality in certain sectors. Nevertheless, these discrepancies change over time and additional effort is needed to understand the underlying drivers.69 In addition, the data exhibit some “break”, which when related to methodological changes or policy changes affecting their reporting, need to be included in the metadata70. As an example, an evident break in LFS statistics is observed in 2013, year in which for the first time the data collection made use of lap top computers during the interviewing phase. Information on the change in tools and methods and the effect on the data are not always readily available to the users.

A significant difference exists between unemployment measured by administrative data and LFS

66 The LFS methodology is based on “Resolution concerning statistics of the economically active population, employment, unemployment and underemployment”, adopted by the 13th ICLS,1982. The main regulation implementing labour force survey in the European Community Member States is the Regulation of the European Council No. 577/98 of March 9th, 1998 on the organization of the labor force sample survey in the Community (as amended).67 Sector Review of the Implementation of the Labor Force Survey in Albania, October 201668 Since the first quarter of 2016, some main indicators are published not only at national level but also at 12 counties level.69 Another issue encountered is the big discrepancies between LFS and HBS data. In particular, self-employment and unpaid employment appear very different to allow for an understanding of distributional analysis of employment (across welfare quintiles/decile).70 2013 LFS CAPI method - The LFS interviews are carried out by face-to face interviewers using laptop computers.

65

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

9101112131415161718

Unemployment rate

Unemployment_ADM Unemployment_LFS

Source: Instat

Dedicated sources are needed to compute wage statistics, while secondary ones such as the LFS may be used to complement the primary ones. The Earnings and Labor Costs data covers statistics on wages, gender pay gap, minimum wage, labor cost, and structure of earnings. The labor costs statistics are produced based on the data collected from the Labor Cost Survey (LCS). A new Structure Earning Survey (SES) is planned and will collect information on the level of wages per employee by gender, age, profession, years of working experience, and education level. Information is combined with enterprise characteristics like their economic activity, size, and location. INSTAT is currently assessing the administrative data sources to make a better use of the payroll datasets provided by General Directorate of Taxation as well as to fill in the gap for years between surveys for labor costs and wages.

While basic data on education exists, no information is available for on the building of skills outside the formal education institutions. The data on education are collected from the public and non-public education institutions of all levels, from kindergartens to universities. The statistical indicators are based on the administrative data from Ministry of Education, Youth and Sports and follow the international classification of education standards ISCED-2011. The education statistics produced regularly by INSTAT do not cover the data on further training delivered by public and private centers, cultural centers, or other institutions, which offer training courses for further qualification for people, who are no longer part of the education system. For this purpose, the Adult Education Survey (AES) has been included in the current OSP that will enable an enrichment of the indicators of formal, informal, and professional education. The survey provides data regarding the structure of adults‟ (aged 25-64) participation in the life-long learning process. It covers particularly the structure of participation in formal and non-formal education and training, and the reasons, difficulties, and participation costs.

While a number of surveys are directed to collecting growth, enterprise creation and FDIs there is a need to collect complementary qualitative information about important business constraints and other qualitative issues. As an example, to inform an FDI promotion strategy INSTAT could introduce special data collections on FDI to understand key challenges facing foreign investors in Albania, what are the comparative advantages that Albania offers, or why investors decide to invest in other countries of the region instead of Albania. INSTAT could introduce a special data collection on management practices.

66

The Global Management Survey Initiative has shown that differences in management practices such as management of human resources and inventories and regular development of business plans can explain significant productivity differences between firms and between countries.

Possible actions for consideration:

Continue harmonizing with Eurostat requirements on the LFS and data exchange as per the recommendation given in the structural assessment. Increase the frequency and granularity of statistical indicators on labor market from LFS once data meets quality requirements.

INSTAT needs to proactively engage with the owners of administrative data sources to facilitate the access to data useful to describe the labor market characteristics and to determine changes in existing or creating new administrative registers to allow for efficient extraction of data for statistical purposes.

Evaluate the possibility to collect and systematize information of data on vacancies, duration of open vacancies, job search, duration of job search, firing, voluntary separations, retirement etc. through existing surveys

INSTAT should make sure - when introducing methodological changes - that the effect of these changes on the consistency of results is estimated. Improve metadata by explaining how changes in methodology, data collection infrastructure and policy actions which affect reporting affect the series.

Implement the Structure of Earnings Survey Continue harmonizing with Eurostat standards.

INSTAT should regularly (at least annually) produce reconciliation tables which highlight differences between estimates from the LFS and from other statistical sources.

Labor market data which are typically underreported, needs to be validated through administrative records, or validated against information such as wages in official vacancy postings or tax enforcement results and the findings should be disseminated to the general public.

B. Monitoring skill building

Generally, education data don’t allow to make causal links between various policy reforms and student achievement. The tracking of labor market outcomes for VET and general education system graduates is limited. Currently the education tracking system in Albania is very fragmented, with limited information collected on labor market outcomes of graduates. Education data quality and availability in Albania is an issue. Data are often aggregated and do not allow for more detailed analysis, for example student level data do not differentiate by urban and rural, similarly expenditure data are aggregated (reported by level of education at most). For two rounds (2012 and 2015) household data from PISA for Albania are unreliable and this does not allow for analysis of determinants of learning outcomes. In 2017, a survey for tracing VET graduates (both for vocational education students and vocational training graduates) was developed with the aim of tracking the career paths and approach to the labor market. Data and research that can feed into the policy decision-making on the optimization of education and capacity building of human capital are needed. Although there are some data available, no suitable system that combines different data sources is available.

67

Understanding skill needs from the businesses needs to combine large and thorough surveys with more frequent information. Information on skills demanded by employers is very useful to inform career decisions and continued education and training decisions of individuals of all ages. Beyond orienting young people in their education and career choices, information on the requirements of employers is useful for various stakeholders such at the National Employment Service (which is expected to assess individual training needs), and the National Agency for VET and Qualifications who is responsible for revising curricula and national training programs to labor market demands. Employer surveys, such as the Skills Needs Analysis (SNA) and the STEP survey, although very useful, are costly, not sufficiently frequent, and subject to significant time lags. One possibility to ensure that real time information is available on the skills needed by employers is to utilize real time labor market information available through online job-search portals.

An assessment of existing adult skills needs to be carried out systematically. Having a clear view of adult skills in a country enables policy makers and others to better understand the relationship between the measured skills and economic and social outcomes, and the factors related to acquiring, maintaining, developing and losing skills. Skills in the adult population can either be measured based on adult qualifications (i.e. diploma or certificates of educational attainment) or through direct measurement. Whereas the prior is easier and less costly, it is not a very good predictor of the real potential of individuals. One instrument for directly assessing adult skills is the Survey of Adult Skills, a product of the OECD Program for the International Assessment of Adult Competencies (PIAAC), which provides detailed information on adults’ proficiency in literacy, numeracy and problem-solving skills, and whether and how those skills are used on the job and throughout life. PIAAC maps the competencies, and it even tries to evaluate how the skills relate to social and economic success of individuals or particular countries.

Possible actions for consideration:

Introduce or improve instruments for assessing student readiness and /skills in the earlier years. For example, instruments that measure school readiness (MEQLO or EGRA) or high-quality PISA or TIMMS.

Implement the Adult Education Survey every 5 years, or depending on the funding, implement

the PIACC with a frequency of at least 5 years.

Complement the Skills Needs Analysis and STEP Surveys with more frequent data from private online job-search portals.

C. Strengthening the National employment service

Improving the performance of the National employment service calls for a modernizing of the data systems in use which is readily used by students job-seekers businesses and policy makers. As discussed in Note 2 the national employment service needs to seek efficiency gains by accessing relevant information, including timely and accurate basic information on the job seekers, automatic tracing of the vulnerable employed through connecting with other systems, as well as profiling of the job seeker through advanced statistical techniques. If available such information could improve counseling, career guidance and job matching with business demand and would contribute to directing scarce resources more effectively.

68

The existing data lack accuracy in basic information collected are not regularly updated, and lack valuable information on the jobseeker profile. In addition, the active Employment Promotion (EP) programs lack adequate information to be targeted to vulnerable groups that are more likely to be jobless. No information is available to track placement rates by social and demographic profiles of beneficiaries or to understand the program performance in terms of employment for each of the categories of the jobseekers. A standardized profiling approach, as used in many OECD and EU countries, could be introduced to improve the targeting and cost-efficiency of EPs and job intermediation services. To track and assess NES performance, as discussed in Note 2 policymakers need also some basic monitoring data including number of employers contacted, number of contacts with employers, number of vacancies, number of job placements due to mediation services and after participation in EPs, number of staff (counselors spending disaggregated by staff at the NES branch office level.

Possible actions for consideration: Upgrading the IT software including:

i. Expanding the database system with additional real time information through better data collection and system interconnection with other central government systems (such as Tax data).

ii. Automatic tracking of any jobseeker after employment / vocational training / promotion.iii. Adding / developing advanced automatic reports in the system, according to management

requirements and to improve NES communication with third parties (monitor services offered to employers; monitor NES performance based on agreed performance indicators and disseminate updated labor market trends).

Introduce a standardized profiling approach for job seekers to improve the targeting and cost-efficiency of EPs

Improve / augment communication and service channels for jobseekers and employers such as: website, mobile app, automatic notifications, call center, etc. with targeted personalized LM / job vacancies information

D. Monitoring migration and labor mobility.

Understanding the dynamics of pull and push factors that drive migration and labor mobility needs a systematic data collection effort. In Albania migration has historically been one of the strong determinants of income growth, labor force availability and skill mix. With a relatively substantial number of Albanians now living abroad, the authorities need to respond to several challenges linked to population aging, brain drain, and return of low skilled migrants, but also size in opportunities, such as using the Albanian diaspora as a gate to invite foreign capital, skill building and foreign markets reach-out. Designing such policy responses requires coordinated efforts between the migrants’ sending and the receiving countries to build comparable timely and readily available statistics on labor migration.

Efforts to understand migration have strengthened but the data are still fragmented lack frequency and sufficient detail. The sources for collecting migrant related statistics are (i) the Population Census 2011 (ii) the Living Standard Measurement Survey (LSMS) 2012 which collects information about emigrants through household members, (iii) thematic surveys such as the one conducted in 2013, (iv) a recently introduced migration module in the LFS and (v) indirect methods used for calculation of net-migration. In addition to national sources, international sources such as the EU based LFS collected by Eurostat UN Statistics, World Bank Group Migration and Remittances data, Eurostat population Statistics complement existing national data with migrants’ characteristics such as age, gender and education, time characteristics such as duration of stay, motives for migration, work experience before and during migration. Progress has been made on the adoption of a legal framework for the collection and

69

harmonization of migration statistics, in accordance with EU Regulation No. 862/2007. However, the data collection system lacks sufficient detail and has several limitations in terms of frequency, disaggregation, space, and timeliness.

There is a need to develop consistent statistics on work experience prior to and during the migration, on the recognition of qualifications, and on the acquisition of new skills. Some information on the employment status sector and occupation is already provided in the household surveys in the destination countries, particularly EU-LFSs. The information is only made available upon request, hence there is a need for better coordination with the national statistical office. However, information on occupational skill level, skills upgrades, or deskilling, matching between skill levels and qualifications required for the respective jobs, progressing in the working place and other issues which capture brain waste, drain or gain are underexplored. NACE, ISCED, and ISCO classifications should be taken as references for constructing harmonized and comparable statistics about working sectors, the level of worker skills, and type of occupation.

The recent inclusion of a migrant module in the 2017 LFS helps tackle the data gaps on labor migration and should be continued. Once carried out for a number of years, this module will provide valuable information on motivation for migration, human capital formation, brain drain, the potential gains that accrue from return migration, the transferability of expertise, and the potential investment of the diaspora. A new set of variables that identify individual behavior or decision making with respect to the allocation of remittances might be useful for designing policy actions or incentives to reposition remittances away from consumption and toward investment71.

Possible actions for consideration:

Strengthen coordination and data exchange with international data providers and harmonize definitions

Develop questions assessing skill dynamics following migration as part of the existing systems

Map the old and new Albanian Diaspora and understand remittances allocation

71 See Western Balkans Labor Market Trends 2018 for a more detailed discussion.

70

Matrix of Policy Actions identified through this series of notes

Labor Market Institutions and Frictions

Labor regulations

1 Allow fixed-term contracts for permanent tasks

2 Replace employer obligation to provide up to 30 days of paid leave to attend urgent personal matters with unpaid leave. Alternatively, it can be negotiated in an individual or collective employment contract.

3 Limit the minimum legal notice period to one month, irrespective of tenure4 Amendment of labor code to cap legally mandated severance pay to six monthly salary

payments5 Make collective agreements time bound (say, for 2 to 3 years) with the possibility to extend the

duration by the parties6 Introduce simplified contracting instruments for short term and casual jobs

Unemployment benefits

7 Reform of the unemployment insurance scheme, allowing for meaningful unemployment benefits for those with strong contribution history

Maternity leave

8 Review of the existing child care systems in Albania with the aim of incentivizing shared parental care responsibilities

National Employment Service (NES) intermediation services and Employment Promotion Programs (EPPs)

9 Introduction of improved NES performance management of branch offices; Development of strategy to improve NES outreach to employers, possibly though introducing assessment

centers that can test skills and personality traits of applicants; or specialized training and re-training courses for existing and new staff of firms; Introduction of an effective case management framework, with a focus on creating tailored approaches to support Ndihma Ekonomike (NE) beneficiaries and other vulnerable groups

10

11

12 Upgrade of the NES labor market IT system, including sharing of vacancy information across districts and improving general NES monitoring and evaluation (M&E) capacity

13

14 Introduction of rigorous and regular impact evaluations for all EPP programs

15 Reshaping the EPP mix: (i) phasing out of ineffective schemes, (ii) consolidation of similar programs, (iii) diversification of EPPs by piloting new types of schemes and (iv) scaling-up programs with a proven track-record

16 Introduction of targeted activation measures/EPs for Ndihma Ekonomike (NE) beneficiaries that are closely coordinated with State Social Services

17 Introduction of performance-based contracting for private sector job intermediation service providers and adult (post-secondary) job relevant skills training;

Labor Demand and the Business Environment

Promoting high-quality job creation through market competition

18 Strengthening of the capacities of dedicated anticartel enforcement officials and case handlers to detect and prosecute anti-competitive practices.

19 Enhancement of ACA investigative powers to break up international cartels, actively promoting its leniency program, developing a dissemination and communication campaign for Albania’s leniency programs for cartel members that come forward to expose illegal agreements

20 Creation of a task force to assess the current weaknesses in the performance of the State Aid Commission, including a review of possible measures to strengthen independence and to increase institutional capacity to block competition-distorting state aid.

21 Ensure that ACA recommendations are formally addressed by sector regulators and ministries (e.g. in the electricity sector), for example by amending the Competition Law72 to include a provision that requires formal response from sector regulators and ministries to

72 Art. 24 (“Duties and Competences of the Commission”) and Art. 70 (“Role of the Authority with regard to regulation and regulatory reform”)

72

recommendations of the ACA on how to design regulations, concessions, procurement processes in accordance with competition principles

Infrastructure for growth

22 Implementation of a budgeting process that ensures appropriate resource allocation between new public investment projects, the maintenance of existing infrastructure and other existing expenditure commitments.

23 Development of a transparent dedicated updated infrastructure action plan, adequately sequenced to follow (i) PIM and Public Private Partnerships (PPP) framework reforms, (ii) a comprehensive analysis of infrastructure needs and priorities and (iii) funding allocations aligned with Albania’s available fiscal space.

24 Implementation of a performance improvement strategy for local water and waste management facilities, including by consolidating small and inefficient local operators as well as by developing performance-improvement plans (including revenue collection targets) for operators in fiscal distress.

Leveraging trade to access larger markets

25 Implementation of the Multi-Annual Action Plan (MAP) for a Regional Economic Area in the Western Balkans, including (i) fully operationalize the certified-trader programs as Authorized Economic Operators (AEO) status73, (ii) improve joint risk management, border controls and one-stop shop border controls and (iii) review domestic regulation in trade in services.74

26 Capacity improvement of Sanitary and Phyto-Sanitary75 (SPS) agencies customs for border controls and data exchange and assist in reducing the number of documents required by SPS border agencies.

27 Establishment of an access to markets committee consisting of all public agencies involved in trade and private sector representatives for policy coordination on trade related issues and establish a formal feedback mechanism with the private sector.

28 Implementation of the National Single Window (NSW) to facilitate trade infrastructure with the key objective to discharge all the regulatory obligations related to import or export with

73 An Authorized Economic Operator (AEO) is a company which, by satisfying certain criteria, is considered to be trustworthy by Customs and other border inspection authorities and therefore entitled to a number of simplified processes and procedures (benefits) as a reward for their long-standing high compliance levels.74 The MAP builds on the CEFTA Additional Protocol 5 on Trade Facilitation, which has been agreed between the CEFTA parties, has been ratified to date by three parties, and is expected to be ratified by all by the end of 2018. The CEFTA AP5 aims to foster regional integration of trade procedures, prescribing, among others, collaboration on risk management, common customs procedures and harmonized documentation requirements, exchange of data and other provisions.75 This concerns the application of food safety and animal and plant health regulations.

73

relevant authorities of the country. These authorities include Customs, Food and Drugs, Quarantine, Ministry of Trade and other agencies that are involved in the import/export clearance process and border control.

Attracting and retaining private investment

29 Adoption of a new unified investment law which streamlines the multitude of existing investment legislation and provides clear, fair and predictable conditions for all investors (foreign and domestic)

30 Establishment of an effective mechanism to resolve investor grievances and retain investment, including grievance tracking procedures and a systemic investor grievance management system.

31 Creation of a task force to recommend measures to strengthen of the country’s investor outreach and promotion framework, including effective sector targeting, investor aftercare, appropriate inter-agency coordination mechanisms and development of a sector specific data and knowledge repository to enable informed investment outreach.

Harnessing the potential of financial markets

32 Adoption of the bylaws under the new Insolvency Law, improvements in the Private Bailiff Fees instructions, and approval of the out of court voluntary NPLs restructuring framework.

33 Implementation of measures to increase access to credit for Albania’s enterprises, in particular MSMEs, including among others (i) creation of a MSME development coordination structure, (ii) development of programs for early stage financing and risk-sharing facilities for MSMEs, (iii) the promotion of digital financial transactions and digitalization of the economy, (iv) enhancing financial education activities and strengthening financial consumer protection, and (v) strengthening financial infrastructure including the establishment of a credit bureau76 as well as modernizing the secured transaction framework.77

34 Actions to develop capital markets, including (i) upgrading the securities market legislation framework and improve capacities of the capital markets regulator and (ii) developing government bond markets.

Unlocking the land market

76 EBRD is working with the BoA and AAB on a new privately-owned credit bureau which will also incorporate info beyond bank data.77 A more detailed set of reforms will be shared with the authorities in May 2018 following the a ‘Finance for Growth for Albania’ assessment which the WB team conducted in mid-March 2018. The report will provide an overview of financial intermediation for the corporate segment in Albania as well as a set of detailed recommendations on how to improve access and usage of financial services, in particular for MSMEs.

74

35 Enactment of two new land laws to replace the current 15 laws: one to cover and conclude the existing transitional land allocation activities, such as restitution/compensation, issuing AMTP (agricultural land allocation document) and legalization; and another to set up the permanent agency and services for the future.

36 Completion of consolidation of Albania’s property institutions (IPRO, Agency for Legalization, Urbanization and Integration of Informal Zones/Constructions (ALUIZNI), the Property Treatment Agency and Agency of Inventory and Transfer of Public Properties (AITPP)) into a single entity.

37 Development of a reliable property registry, including (i) full registration of land and (ii) updating IPRO records, moving to digital data and integrated land administration services.

38 Establishment of a training agency for notaries (National Training Centers for Notaries) to ensure knowledge of the legislative framework on property registration.

39 Development of a regulatory framework (decrees and/or ministerial orders) defining certification procedures for local offices staff of Immovable Property Registration Offices (IPRO) to guarantee registration of joint ownership for women.

Providing reliable electricity access

40 Settlement of outstanding arrears in the electricity sector according to the updated Energy Sector Financial Recovery Plan

41 Implementation of the power sector reform consisting of (i) full sector unbundling, (ii) operationalization of the Albania Power Exchange, (iii) facilitation of the settlement of transactions between power producers and retailers and (iv) deregulation in retail markets with a priority on non-household medium and low voltage users.

42 Development of an action plan for diversification of Albania’s energy sector and for reducing medium-term exposure to droughts, including gasification of the economy (building on the Gas Master Plan) and use of renewable energy.

Ensuring effective contract enforcement and a reliable administration

43 Development of streamlined court proceedings. including (i) establishment of a fast-track procedure for small claims and (ii) electronic case management tools for judges and lawyers.

44 Expansion of alternative dispute resolution (ADR) mechanisms, including fiduciary incentives78 for out-of-court mediation or conciliation.

78 For instance, if mediation or conciliation is successful, a refund of court filing fees, income tax credits or the like

75

45 Full operationalization of the new anti-corruption investigation structure.

46 Criminalization of all acts of corruption and ensuring effective international cooperation.

47 Development of a strengthened and more comprehensive asset declaration regime

The right fiscal policy to encourage business and preserve macro-fiscal sustainability

48 Continued and decisive expenditure consolidation and implementation of Albania’s fiscal rule, cutting inefficient operational spending and fully exploiting synergies from the merging of subnational government entities.

49 Measures to broaden the tax base, including by enforcing tax compliance and reviewing the cost-benefit trade-offs of current tax expenditures.

50 Full implementation of the Public Financial Management (PFM) Strategy 2014-2020, including full operationalization of a PPP Management framework, including publication of a comprehensive fiscal risks statement and transparent cost-benefit analysis of the current PPP project pipeline.

51 Review of measures to reduce the administrative burden of paying taxes, carefully coordinated with efforts to strengthen the tax administration and tax compliance.

Labor Supply and Skills

Fostering greater foundational skills development through childhood and basic education

52 Adoption of national education budget optimization strategy, including (i) school and classroom optimization analysis to seek efficiency gains in light of demographic decline, (ii) redeployment of additional fiscal resources to currently under-funded parts of the education sector (such as pre-school education, rural and poor areas) and (iii) introducing transparent per capita financing (PCF) to tailored to levels of pre-university education.

53 Preparation of a report proposing recommendations to strengthen early childhood education and care (ECEC) effectiveness, including measures to improve quality and equity (targeting of vulnerable children).

54 Introduction of comprehensive pre-service and in-service teacher training, including (i) peer mentoring programs and (ii) instruments to track teacher effectiveness.79

55 Introduction of robust and reliable student assessment (national and international) and

79 Possibly adapting the Classroom Assessment Scoring System or other tailored instruments.

76

mechanism to improve the quality of data collection.80

56 Increase of funding for public education over the medium-term, depending on available fiscal space

Fostering job-relevant skills through Vocational Education and Training (VET) System

57 Implementation of the Law on Vocational Education and Training (approved in 2017), including key bylaws that regulate the roles and responsibilities of NESA, NAVETQ and other players.

58 Enactment of the Albanian Qualifications Framework Law, enabling VET qualifications that are internationally recognized, and completion and approval of the bylaw on quality assurance and initiation of the accreditation of VET providers (both public and private)

59 Reinforcement of VET qualifications quality chain, starting from the labor market needs till to the awarding of a qualification, including through (i) establishment of sector skills committees that include representation from the private sector to identify curricula tailored to private sector needs, (ii) establishment of LMIS and regular surveys to identify skills gaps in the economy (STEP, PIAAC) and setting up a holistic career guidance and counseling system to assist individuals in making and implementing informed educational and occupational choices. (iii) stronger emphasis on VET models that integrate work-based learning and (iv) systematic impact evaluations for training programs.

60 Introduction of performance-based funding model/competitive grants program for public and private VET/VTC provisioning

Building on the Foundation of Higher Education Reform

61 Implementation of the Higher Education Law in consultation with HEIs and relevant stakeholders, including continued implementation of the quality assurance and financing reform

62 Review and identify needs of HEIs to implement the reforms and provide continued assistance to ensure successful implementation

63 Introduce and implement graduate tracer studies to improve alignment of education with needs of the labor market

Tackling Albania’s migration challenge, including brain drain/Identifying sectors for skills demand assessment

80 For student learning outcomes and school readiness, these could include EGRA, MELQO, TIMMS and PISA.

77

64 Establishment of working group to review the effectiveness of “Migration Counters”, including the option to move to a stronger web-based presence to engage with return migrants interested in these services

65 Development of international agreements to ensure the transferability of pension rights and recognition of educational degrees for return migrants

66 Campaign to strengthen ties of Albania’s diaspora to its home country, including embassy events for expatriates such as investment and trade shows

78

WB Macro-Fiscal Forecast for Albania81

ALBANIA 2013 2014 2015 2016 2017e 2018f 2019f 2020f

Real GDP growth (percent) 1.0 1.8 2.2 3.4 3.8 3.6 3.5 3.5Composition (percentage points):

Consumption 0.9 4.5 -0.9 0.1 1.3 2.0 1.9 2.4Investment -0.8 -0.9 0.7 1.4 2.1 1.1 1.0 0.6Net exports 0.9 -1.8 2.4 1.9 0.4 0.5 0.6 0.5

Exports 0.5 0.9 0.5 6.5 4.1 3.7 3.8 3.8Imports (-) -0.4 2.7 -1.9 4.6 3.7 3.2 3.2 3.3

Consumer price inflation (percent, period average) 1.9 1.6 1.9 1.3 2.0 2.1 2.3 2.8

Public revenues (percent of GDP) 24.2 26.3 26.6 27.6 27.6 28.1 28.1 28.1Public expenditures (percent of GDP) 29.2 32.3 31.5 29.4 29.6 30.1 29.7 29.4

Of which: Wage bill (percent of GDP) 5.2 5.1 5.1 4.6 4.7 4.8 4.7 4.5Social benefits (percent of GDP) 9.5 9.9 9.9 10.4 10.4 10.3 10.4 10.3Capital expenditures (percent of GDP) 4.8 4.3 4.4 4.0 4.4 5.2 5.0 4.9

Fiscal balance (percent of GDP) -5.1 -6.0 -4.9 -1.8 -2.0 -2.0 -1.6 -1.3Primary fiscal balance (percent of GDP) -1.7 -3.1 -2.2 0.7 0.6 0.5 1.0 1.5Public debt (percent of GDP) 61.7 66.1 69.1 68.7 67.8 65.5 62.7 61.7Public and publicly guaranteed debt (percent of GDP) 70.4 72.0 73.1 72.4 71.0 69.0 66.6 64.7

Of which: External (percent of GDP) 26.9 29.6 34.2 32.7 33.7 36.7 35.8 35.8

Goods exports (percent of GDP) 11.1 9.3 7.5 6.6 6.9 7.3 7.4 7.5Goods imports (percent of GDP) 31.5 31.6 30.0 30.9 31.1 30.7 30.5 30.3Net services exports (percent of GDP) 2.4 3.2 5.1 7.4 9.3 7.9 8.3 8.6Trade balance (percent of GDP) -18.0 -19.1 -17.4 -16.9 -15.0 -15.5 -14.8 -14.2Remittance inflows (percent of GDP) 6.9 7.2 7.5 7.2 6.7 7.2 7.1 6.9Current account balance (percent of GDP) -9.3 -10.8 -8.6 -7.6 -6.9 -7.1 -6.9 -6.7Net foreign direct investment inflows (percent of GDP) 9.5 8.1 8.0 8.7 8.3 8.5 7.0 6.5External debt (percent of GDP) 66.1 69.6 73.6 72.4 70.4 73.0 70.4 68.7

Real private credit growth (percent, period average) -2.7 -1.4 -1.8 -2.1 -2.3 n.a. n.a. n.a.Non-performing loans (percent of gross loans, end of period) 24.1 22.4 18.2 18.3 13.2 n.a. n.a. n.a.

Unemployment rate (percent, period average) 15.9 17.5 17.1 15.2 13.8 n.a. n.a. n.a.Youth unemployment rate (percent, period average) 27.2 32.5 33.2 29.0 25.9 n.a. n.a. n.a.Labor force participation rate (percent, period average) 52.4 53.7 55.7 57.5 58.3 n.a. n.a. n.a.GDP per capita, PPP (current international $) 10,255 10,645 10,926 11,276 11,693 12,114 12,526 12,964Poverty rate at US$5.5/day, PPP (percent of population) 37.7 35.9 35.4 33.9 32.8 31.3 29.6 27.2Sources: Country authorities, World Bank estimates and projections.Notes: Youth unemployment rate is for labor force aged 15-29.

81 As published in the Western Balkans Regular Economic Report: Spring 2018.