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IBRD 25966

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ALBANIA AND THE WORLD BANKBUILDING THE FUTURE

THE WORLD BANmWashington, D.C.

The views and interpretations in this booklet are not necessarily those of theExecutive Directors of the World Bank or the countries they represent. Themap on the inside front cover was prepared exclusively for the convenience ofreaders of this booklet; the denominations used and the boundaries shown donot imply, on the part of the World Bank and its afiliates, any judgment onthe legal status of any territory or any endorsement or acceptance of suchboundaries.

Albania and the World Bank was written by Mary Catherine Andrewsand Gulhan Ovalioglu of the Central Europe Country Department orthe World Bank's Europe and Central Asia Regional Office, with theassistance of numerous colleagues in the department and counterpartsin Albania.

Photographic creditsCover: Gisu MobadjerPage 2: Gulhan OvaliogluPage 10: Kemal DerviPage 13: Gulhan OvaliogluPage 25: Richard MacEwenPage 31: Gian Carlo GuardaPage 35: Maria NowakPage 40: Maia NowakP_age 45: Matthew VogelPage 57: Daniel Zelikow'Page 62: Rory O'SullivanPage 67: Gisu MahadjerPage 80: M. C. AndrewsPage 83: Rochelle HiltonPage 85: Kemal Dervi*

Cover photograph: Children at the informal market in Pogradec

Cover design: George Parakamannil

Map: Jeffrey N. Lecksell, Cartography Unit, World Bank

The design used on the title page and on the chapter opening pages is theeagle that appears on the Albanian flag.

First printing July 1994

ISBN 0-8213-2850-6

Contents

Introduction 1Historical Perspective 1Economic and Political Revolution 6The World Bank in Albania 10Notes 16

Investment in Infrastructure 17Transport 19Water, Sanitation, and Energy 24Housing 28Telecommunications 29

Agriculture 33Land Policy 36Agricultural Infrastructure and Services 38Price Policy 43Fisheries and Forestry 44

Alleviating Poverty and Supporting Human Resources 48Poverty Alleviation 50The Labor Market and the Social Safety Net 54Health Services 59Education 61

..

Supporting the Development of a Private Sector 64State Enterprise Sector 65Developing a Financial System 74

Looking Forward 79Successes 81Challenges 84

iv

INtRODUCTION

Between the end of World War II and 1990, Albania enduredone of the most authoritarian regimes in history. A combina-tion of strict central ulanning, isolationism, and totalitariancontrol over every aspect of life blocked economic and socialdevelopment. In 1990 the Communist regime started to disin-tegrate. After two years of chaos, a complete economic, politi-cal, and social transformation process started in earnest,following the frst truly democratic elections, in March 1992.This booklet describes the beginnings of Albania's cooperationwith the World Bank Group.1 It is our hope that the programsand projects described here will lead to growth and greaterprosperity for the Albanian people.

Historical Perspective

Ibday's Albanians, primarily descendants of the ancient Illyr-ian tribes who settled in the region in the seventh century B.C.,are a non-Slavic people with Indo-European ethnolinguisticroots. The country's population is estimated to be 3.5 million,and another 3 million ethnic Albanians live in parts of theformer Yugoslavia. Over the centuries, Albanians emigrated tomany parts of the world, and there are people of Albanian on-

1

¶~~~~~~~~~~~~~~~~~~~~~~~~~ ~ ~ ~

lX~~~~~~it

In Skanderbeg Square, 7irane

gin in North America, Europe, the Middle East, and even Aus-tralia. The religious composition of the country is estimated atapproximately 70 percent Muslim, 20 percent ChristianOrthodox, and 10 percent Catholic. In Albania these religionshave coexisted in an atmosphere of mutual tolerance,although all religious practice was suppressed during theCommunist regime. 'Ibday Muslim and Christian religiousfeasts are celebrated equally. The president comes from a Mus-lim family and the prime minister from a Christian Orthodoxone. Albania is a member of the United Nations, the Council ofEurope, the Conference on Security and Cooperation inEurope, the Organization of Islamic States, and the Partner-

2

ship for Peace program of the North Atlantic Treaty Organiza-tion (NATO).

The area of present-day Albania became a part of the Otto-man Empire in the 1470s after a twent;y-five-year resistanceled by Gjergj Kastrioti-Skanderbeg, an Albanian nationalhero and a skillful general admired by Albanians and Otto-mans alike. Until the early twentieth century, the territorycomprising modern-day Albania remained under Ottomanadministration.

During the Ottoman period many Albanians converted toIslam, and a large number became high-ranking officers in theOttoman army or the imperial administration. Intermarriagebetween Albanians, Turks, Bosnians, Macedonians, Bulgari-ans, and other groups in the Ottoman Empire was frequent,and many of the most famous figures of modern Ottoman hiLs-tory had Albanian roots. Mohammed Ali, the founder of mod-em Egypt, who almost succeeded in taking over the entireOttoman administration from his base in Cairo, was an Alba-ni. Ali of 'Tpelen6, another powerful Albanian-Ottoman,came close to creating a modern Albanian state in the early1800s. Albanians were strongly represented both in MithadPasha's Tanzimat movement, which attempted to reform theOttoman Empire in the second half of the nineteenth century,and in the Union and Progress Committee formed in Mace-donia. The latter organization was pivotal in the 1908 revolu-tion, the proclamation of a constitutional monarchy inIstanbul, and ultimately, after World War I, the Kemalist revo-lution that .., -a, --I '-.e modem republic of Turkey. It is impor-tant to stress this aspect of Albanian history, for it illustrateshow Albanians took part both in high-level public administra-ltion and in attempts at radical socioeconomic reform.

The question of Albanian national lands was first addressedby the Prizren League in the 1870s. The league did not seekestablishment of an Albanian state, but one of its prioritieswas to prevent foreign powers from infringing on Albanian-inhabited lands. The 1912 London Conference on the Balkanscreated an Albanian state, but without the Albanian-inhabitedareas of Cameria in the south and Kosovo in the north. The

3

country's first government was formed by Ismail Qemal, whohad been one of Mithad Pasha's favorite lieutenants duringthe Tanzimat period. Qemal had distinguished himself as oneof the most efficient and modernizing Ottoman administratorsbefore he turned his energies to the creation of an independentAlbania, having given up hope that the Ottoman Empirecould be turned into an effectively functioning multinationalfederation.

The years between World Wars I and II were fraught withinternal political instability as a result of regional tensionswithin the coumitry and foreign influences on domestic politics.Archbishop Fan Noli, a Christian Orthodox clergyman andpolitician, wanted his country to move beyond regionalism andclan issues. He advocated a Western-style government thatwould provide social services and promote agricultural reform,political liberties, :nd resistance to foreign pressure in domes-tic politics. However, Noli never had an opportunity to imple-ment his reforms. He was installed as president in June 1924and in December was ousted from office by his political rivalAhmed Bey Zogu.

Zogu introduced a repressive regime, outlawed politicaloppowition, and ultimately declared himself King Zog. Begin-ning in the mid-1920s, the Italian government signed eco-nomic and foreign relations treaties with Albania andprovided large financial subsidies to the Zog regime, ensuringa dominant position for Italy in Albania. In the spring of 1939the Mussolini government forced the Albanians to sign addi-tional agreements. These led to Italian annexation of Albaniaand to surrender of the royal crown to Italy's King VictorEmmanuel III.

The World War II years were turbulent for Albania underItalian occupation. The National Liberation Movement,formed in 1942, was associated with a Communist group ledby Enver Hoxha. The conservative nationalist group known asthe Balli Kombetar was organized under a program calling forunion of the Kosovo territories with Albania and the exclusionof King Zog from any postwar government. After Italy surren-dered Albanian territories in September 1943, German troops

4

invaded the country and set about forming a governiment sym-pathetic to the Balli Kombetar. However, when the Germanforces left Tirand in 1944, the government fell. Following abrief civil war, the National LiDeration Movement formed anew government with Enver Hoxha as its leader.

The post-World War II years began with a close alliance be-tween Marshal Tito's Yugoslavia and the Albanian CommunistParty. Although Hoxha instituted a government system basedon orthodox Marxist ideology and Stalinist practices, postwarYugoslav patronage countered the prewar Italian influence,and the allianice between Tito and Enver Hoxha continuedthrough the 1940s. By the end of the 1940s, however, relationsbetween Hoxha and Tito had disintegrated, and Albania hadforged an affiliation with t;he U.S.S.R. The Albanian-Soviet re-lationship, in turn, suffered increased tensions in the late1950s when Soviet leader Nilita Khrushchev departed from astrict Stalinist ideology. In the early 1960s tensions betweenthe Soviet and Albanian regimes temporarily declined. Subse-quently, however, the Albanian regime broke diplomatit rela-taons with Moscow because of Soviet interference in domesticpolitics and began siding with the Chinese in the Sino-Sovietdispute.

In return for their industrial and technological assistance toAlbania during the 1960s and 1970s, the Chinese gained asphere of influence in Central and Eastern Europe. After thedeath of Chairman Mao Ze-dong in 1976, Hoxha accused theBeijing leadership of rerisionist leanings, which led to a seriesof conflicts between China and Albania. The final disputearose from China's overtures toward the Ulnited States andYugoslavia; diplomatic relations between Albania and Chinawere severed in 1978.

During the years of Soviet-Albanian and Sino-Albanian alli-ances, the Hoxha governent received economic assistanceand investments from its alhes, although most of the foreignequipment was antiquated even then. After the demise of theYugoslav, Soviet, and Chinese alliances, Albaneia's isolationfrom both East and West exacerbated its stagnation and pov-Lrty. From the end of the Sino-Albanian alliance, Enver Hoxha

5

became increasingly autocratic, asserting extreme isolationistpolicies and strossing national self-reliance. For examplo, liun-dreds of thousands of small concrete bunkers were built, par-ticularly along foreign borders and tlho coast, at a cost thecountry could ill afford. A clause was added to the constitutionprohibiting Albania from "seeking foreign aid and credits orforming joint companies with foreigners," The 1976 constitu-tion formally abolished private ownership of property and pro-hibited practice of any religion, giving force to a 1967 act andmaking Albania the first officially atheist state in the world.Simultaneously, HoxhaWs secret police, the Sigurimi, liquidatedall manifestations of dissent and political opposition.

Until his death on April 11, 1985, Enver Hoxha exertedstrict control over domestic economics and politics, while inter-nationally the country remained totally isolated. Ramiz Alia,Hoxha's hand-picked successor, initially continued the dicta-tor's xenophobic policies. But by the late 1980s Albania's eco-nomic condition had deteriorated to the point that PresidentAlia was forced to make some modest attempts at economicliberalization. Partially abandoning the doctrine of self-reliance, he reestablished political and economic relationswith several Western countries, including Austria, the FederalRepublic of Germany, and Italy.

Economic and Political Revolution

The refugee crises in the summer of 1990, when thousands ofyoung Albanians clamored for escape to Italy and Greece,exposed Albania's internal problems to the international com-munity. Meanwhile, Albania sought admission to the Confer-ence on Security and Cooperation in Europe but was rejectedbecause of concerns over human rights violations.

In Eastern Europe as a whole, the winds of change hadbecome irresistible. In December 1990 student and laborstrikes put significant pressure on the Alia government formultiparty elections, and on December 19, 1990, the firstopposition party, the Democratic Party of Albania, was offi-cially registered.

6

The collapse of the old regime in Albania is attributable tothe steady economic decline over the years, which was fueledby the government's political and social repression of largesegments of the population. Although the Alia regime allowedgreater independence to enterprise managers, sufficient incen-tives for increasing production were not provided, and theprice system remained unchanged. In the late 1980s the gov-ernment allowed importation of some consumer goods in anattempt to satisfy rising public demand. Meanwhile, transfersfrom state enterprises to the budget decreased, yet employ-ment increased as a result of the continuing expansion of theworking-age population. Halfhearted relaxation of economiccontrols without real structural reforms led to significant macro-economic deterioration.

In early 1991 production began to collapse in both agricul-ture and industry. The firstl multiparty elections since FanNoli's time were held on March 31, 1991, and although the rul-ing Albanian Workers Party manipulated the elections, theopposition Democratic Party of Albania enjoyed wide supportin the main cities. Despite its success in urban areas, the oppo-sition did not gain sufficient seats in the parliament to form agovernment. Prime Minister Fatos Nano was again given thegovernmental mandate by President Alia, but his governmentfell in May 1991 following extensive labor strikes. Ylli Bufiwas asked to form a multiparty caretaker government, andthe opposition decided to join his endeavor.

During the same period, the Albanian Workers Party (thename adopted by the Commiunist Party in the 1960s) followedthe lead of other Communist parties in the region and changedits name to the Albanian Socialist Party. Meanwhile, the oppo-sition Democratic Party began to push for economic and politi-cal reforms. Under the Democrats, who had support in thePeople's Assembly and control of the Ministry of Finance andthe Ministry of the Economy, privatization of agriculturalcooperatives began, although in a disorderly manner; privatebusiness activities were legalized; and price controls were par-tially removed. As was true of previous attempts at economicreform, there was no coherent and decisive reform strategy,

7

and the piecemeal reforms led the country into even greatereconomic instability. Production, according to official figures,fell 24 percent in the agricultural sector and 37 percent inthe industrial sector, although these figures should be takenas only rough estimates, given the weakness of the data-gatherin.g and -reporting system.

In an effort to force early elections, the Democratic Party,led by Dr. Sali Berisha, withdrew from the government inDecember 1991. A caretaker government under Prime Minis-ter Vilson Ahmeti came to power as the economy entered aperiod of even greater crisis marked by mass destruction ofstate-owned property, including schools, transport and electri-cal systems, food distribution warehouses, and hospitals. Pop-ular manifestations of frustration over the political situationand the absence of consumer goods gave rise to an increase instreet crime, which had been almost unmknown under the Com-munist regime.

Against this backdrop, early elections were scheduled forMarch 22, 1992. The opposition, primarily tne DemocraticParty, had garnered a large number of supporters throughoutthe country in the year since the last elections and had focusedits campaign messages on Albania's integration into Europe.The Democratic Party successfully blamed the Communistregimes for social and economic collapse. At the same time,fear of retribution against those supporting the DemocraticParty had diminished. The average voter believed that eco-nomic conditions could only improve under a new politicalleadership. On election day, the opposition carried almost two-thirds of the vote nationwide and subsequently established agovernment with the strongest mandate for complete socioeco-nomic transformation in post-Communist Easter Europe.

In April 1992 the parliament elected as president Dr. SaliBerisha, a cardiologist-turned-politician and the chairman ofthe Democratic Party. Prime Minister Aleksander Meksiformed a government composed of leading pro-democratic poli-ticians and nonpolitical intellectuals. The new governmentimmediately launched ambitious political and economicreform programs. The basic goals of the economic reform mea-

President Berisha on Albania's Economic Program'We decided to stick to the IMF [International Monetary Fund] programin a very difficult situation, and we respected all its items. We are mak-ing huge sacrifices, but at the same time we are demonstrating thatfreedom is working. Graduality seems at first sight to be the "social"approach. But it could have been a prolonged agony, and that is thereason that I pay tribute to shock therapy. Hard decisions are neces-sary for difficult situations. Graduality, to me, is a slow, painful agony.Shock therapy is a real electric shock. I use medical terms, but youcoulld also say that it is an earthquake where you get better sooner.'

Interview with the Central European Monthly, July 1993

"Many friends of ours speak of the Albanian miracle, but this is notthe case. Albania is still the poorest country in Europe and willremain as such for a given time. What these friends call the Albanianmiracle is the fact that the economic reforms saved Albania from fall-ing down into the abyss of history, wherein it was going before March22, 1992."

Speech to the Albanian Democratic Party Congress., December 1993

sures were to stop the emerging hyperinflation, reestablishcontrol over the budget, privatize agriculture, and mobilizeforeign economic support.

The World Bank in Albania

The Bretton Woods institutions-the World Bank and theInternational Monetary Fund (IMF)-and Albania entered intoa working relationship only in 1991, when Albania soughtmembership in these international financial institutions. Formore than three decades the Hoxha regime had avoided anycontact with multilateral organizations, which the regime hadbranded imperialist agencies. Things finally changed in late1990, as the Alia government felt the pressure of events else-where in Eastern Europe and as Albanians themselves forcedthe regime to liberalize and retreat from the intransigent iso-

9

- - r.

Zr-Jr

* ; f - 4 ^9--

President Sali Berisha (right) with Kemal Deruiq of the WorldBank on a mountain road near Vlor6, July 1992

lation of the past. The Republi of Albania became a member

of the World Bank on October 15, 1991.A new, much more active phase of cooperation between the

World Bank and Albania began when elections were announcedfor March 22, 1992. The opposition had pulled out of the coali-tion government, and the country was in a desperate situa-tion, with production collapsing, law and order brealing down,many Albanians trying to flee the country, and inflation accel-erating to more than 500 percent on an annual basis in thelast two months of 1991.

The World Bank's management saw the spring elections as amuch-needed opportunity to stop the slide into economic chaosand provide support through a rehabilitation program. Inearly January 1992 Kemal Dervi director of the Bank's Cen-tral Europe Department, made an initial management visit toAlbania, accompanied by Huda Kraske, the Bank's first coun-try officer for Albania. They insisted on meeting the leaders

10

and representatives of all political parties contending in theupcoming elections. In these meetings the World Bank offeredprospects for strong, rapid financial and technical support fora rigorous and comprehensive reform program immediatelyfollowing the elections. The World Bank explained that if sucha program were to receive broad international support andbenefit from the best possible teclnical advice, it would needto be supported by an arrangement with the IMF. IMF staff, fortheir part, started preparing the ground for such a programwith two visits in January and February 1992. Basic datawere gathered, and consultations started with other donors,notably the European Community (now the European Union).

With the sweeping victory of Dr. Berisha's Democratic Partyin the spring elections and the installation of the first non-Commnunist government, under Prime Minister Meksi, inApril 1992, a new phase opened for Albania and for its cooper-ation with the Bretton Woods institutions. The preparatorywork done in January and February proved decisive; plans fora stabilization program with the IMF and a Critical ImportsProject with the Bank were ready the very day the new gov-ernment took office. Negotiations with both the Bank and theFund were successfully completed in May and June, and the$41 million Critical Imports Project was presented to theBank's Board on June 25, 1992, only eight weeks after tne for-mation of the new government.2 Albania became eligible forcredits from the International Development Association (MA),which are available on more concessional terms than standardWorld Bank lonns or loans from commercial banks.

In July, along with the implementation of the CriticalImports Project, which was targeted at supply responses inagriculture, power, and transport, Albania launched a "shocktherapy" macroeconomic stabilization program agreed withand supported by the IuArm. Only days after the signing of theletter 'f intent, an aid coordination meeting led by the Euro-pean Union convened in Tirane to broaden internationalfiancial support and harmonize the efforts of the variousdonors. On August 1, 1992, the World Bank opened a ResidentMission in Tiran&.

11~

Implementing World Bank Projects

The World Bank has standard procurement rules, such as interna-tional competitive bidding, limited international bidding, and inter-national or local shopping, so that enterprises from all membercountries can participate in the bidding, with attention to economyand efficiency. These rules apply to all borrower countries. They are.,however, not always well understood, they are not easy to enforce,and they can lead to many problems in project implementation. Thensure that all goods procured for the government on the interna-tional market meet international criteria and are bought in a waythat allows competition, Project Implementation Units (Pius) havebeen established within the Albanian government.

implementation of the first World Bank projects has been coordi-nated through a PIU in the Ministry of Finance- That unit has beenprimarily preoccupied with implementation of the Critical ImportsProject, Technical Assistance for Economic Reform, and the Agricul-ture Sector Adjustment Credit Because of the wide scope of WorldBank operations in Albania, Pius have been set up in other ministriesas well.

The vigor and results of Albania's version of shock therapyhave been impressive. Almost all prices were immediatelyfreed except for bread-the price of which was, however,increased fourfold-and some other staples. (Pensioners andsome workers received financial compensation.) All quantityrestrictions on imports were lifted, and the exchange rate wasallowed to float. Tariffs were lowered to an average of 20 per-cent The budget deficit was cut in half, Central Bank creditsto enterprises were curtailed, and tight overal monetary tar-gets were strictly enforced. An incomes policy linked publicsector wages to enterprise performance. Most of agriculturewas privatized before the end of 1992 and almost all housingby the end of 1993. The figures that follow summarize themacroeconomic results of this shock treatment.

The initial success of the macroeconomic program does notmean that the rehabilitation and development of Albania,after years of oppression, isolation, and poverty, will be a quickand easy process. On the contrary, immense structural andinstitutional obstacles remain as the country tries to regainsome of the grouncd it has lost over decades.

12

The World Bank's Resident Mission in Albania"Our main duty is to create a 'human link with the World Bank head-quarters, to facilitate project preparation and implementation, andsolve the bottlenecks encountered during these processes. Further-more, we provide informal technical assistance to the Bank's projectimplementation units, as well as hands-on policy advice to the gov-ernment on request.

"Since all task managers cannot spend all of their time in Albania,our project officers and economist coordinate and oversee the variousphases of the project process. With the large number of projects underpreparation and implementation in Albania, the pace of our work canbe exacting. At the same time, the work is particularly rewarding.The economic changes in Albania are happening at a brisk pace, andbeing on the cutting edge of policy andr project decisions related tothese changes provides unique challenges as well as rewards."

Kutray Ebi World Bank Resident Representative in Albania

Ab!b~~~Jim~~~~~~~

A,: ~~~~~~~~~~~~~~~~~~~*r w @__I

The staffof the World Bank's Residnt Mission, YIran

13

Macroeconomic Indicators, Albania, 1991-93

Gross domestic productIndex100

95

90 -

85

80 June December June December June December1991 1991 1992 1992 1993 1993

Inflation (annual basis)Percent300

250-

200 -

150

100 _

50

0June December June December June December1991 1991 1992 1992 1993 1993

Domestic defict financingPercentage of GDP

so

70-60-50 40-30-20100June December iune December June December1991 1991 1992 1992 1993 1993

14

Market exchange rate (end ofperiod)Lek/dollar120

100 -

80

60-

40-

20

June December June December June December1991 1991 1992 1992 1993 1993

Gross reserves (excluding gold)Weeks of imports

10

$

6

4

2

0June December June December June December1991 1991 1992 1992 1993 1993

T Start of adjustment program supported by the World Bank and the IMP'.

Note: Data are semiannual.Source: Albanian national data; World Bank and IMF staff estimates.

The vigorous output growth that followed on the heels ofdecisive victory over the hyperinflation which had been devel-oping in early 1992 demonstrated that a tough macroeconomicprogram does not condemnn a formerly Communist country tostagnation. Oni the contrary, it may actually be a condi-tion fornew growth. But can this success be sustained? Can macroeco-nomic stability endure despite the pent-up frustration of apopulation that has gone through terrible suffering and now

15

expects rapid improvements in real income? Can a countrylocated in a region threatened by ethnic tensions, with threereligions and with a history of violent repression, emerge as asmall haven of peace and economic growth? How can privati-zation be successful outside agriculture and services? Can anew public administration that is adapted to a market econ-omy emerge?

In 1993 Albania benefited from a substantial inflow of for-eign aid. How can sufficient foreign resources be mobilized fora few more years to consolidate the recovery? Can the WorldBank help design and, what is more difficult, implement awork program that contributes to the continuation of this ini-tial success?

Only the future will show whether Albania can overcome itsdifficulties and achieve prosperity and peace for its people. Atthe invitation of Albania's leadership, the World Bank Grouphas decided to extend its ful support to Albania's developmenteffort, within IDA's tight resource constraints.

The men and women of the World Bank, working with theirAlbanian counterparts, have launched a broadly based effortthat reaches out into many sectors to help build a new modemAlbanian economy. This booklet describes these joint efforts.In it, some of the people who are leading this work explaintheir hopes and visions, going beyond the often subdued andperforce technical language of official documents. Their wordsreflect much effort, great concern, and immense hope for Alba-nia's future.

Notes

1. The World Bank Group consists of the Iaternational Bank forReconstruction and Development (IBu) and the International Devel-opment Association (IDA), together referred to as the World Bank, andtheir affiliates, the International Finance Corporation (IFC), theInternational Centre for Settlement of Investment Disputes (Icsm),and the Multilateral Investment Guarantee Agency (hIGA). TheWorld Banks central purpose is to help raise standards of living indeveloping countries by channeling financial resources from indus-trial countries to the developing world.

2. All dollar amounts are current U.S. dollars.

16

INVESTMENT IN INFRASTRUCTURE

As a consequence of failure to invest enough in maintenanceor new construction after the mid-1970s, Albania!s infrastruc-ture is not adequate to support a moderm society and a marketeconomy. The situation, although not entirely unlike the pre-dicaments of other Central and East European countries, ismore difficult because the period of total stagnation in the1980s and the transition crisis during 1990-92 were worsethan elsewhere. Albanian wages are comparatively low andthe work force is relatively skilled, which should make thecountry attractive to foreign investors. The pristine mountainsand expansive Adriatic beaches make Albania potentially anideal tourist destination. But the lack of adequate infrastruc-ture is hindering foreign investment in both industry andtourism.

Albania did receive some technology, investments, and for-eign aid from the U.S.S.R. during the period 1950-61 and fromthe People's Republic of China between 1961 and 1978. Most ofthe hydropower plants were constructed by the Chinese.Unfortunately, the technology was generally mediocre in qual-ity, low in efficiency, and targeted largely at agriculture andindustry. By the beginning of the 1990s even the newest struc-tures were in a desperate state of disrepair.

17

During the years of total isolation, the scarce resources weretargeted toward industry and agriculture in an effort to attainself-sufficiency at any cost. 'Ibday, few examples of modernbuildings can be found. Among the notable exceptions are twothat are indicative of the emphasis on the Communist Partyduring that era and the attempt to create a new Communist"culture": a museum built to honor former dictator EnverHoxha, and the Palace of (Communist Party) Congresses.These buildings, as well as a museum honoring the nationalhero Skanderbeg, were constructed at great expense, with cen-tral heating, air conditioning systems, and other luxuriesunlmown to most Albanians.

With the political and social turmoil in 1991-92, the infra-structure, particularly schools and distribution systems forelectricity and water, was fiurther battered by misuse andmalicious destruction. Following the March 1992 elections, thenew government drew up plans to rehabilitate existing roads,housing stocks, and water and electricity distribution centerswhile assessing possible new investments.

The first World Bank operation in Albania, the CriticalImports Project, financed modern parts and equipment torestore roads, ports, and other infrastructure, mend local irri-gation systems, repair hydropower stations and electricitytransmission and distribution systems, and promote agricul-tural production. The objective was to support the develop-ment of economic activity, particularly in agriculture, byenhancing the ability of the new smallholders to produce agri-cultural goods and distribute them to nearby markets.

The need for rehabilitation and new investments far exceedsfinancing possibilities. Ib provide strategic plans for andfinance of rehabilitation and new investments, the Albaniangovernment, with the assistance of the World Bank, has devel-oped a three-year Public Investment Program. This program,which is to be updated each year, encompasses all sectors ofthe Albanian economy and attempts to provide a sector-by-sector overview of where new investments will be made orexisting structures will be rehabilitated.

18

The World Bank has completed a number of studies oninfrastructure, assisted with the formulation of strategies, andfinanced investment projects in certain infrastructure subsec-tors. At the same time as the World Bank is emphasizing reha-bilitation of existing structures, the Albanian government isseeking additional financing from other sources and is usingfunds from the state budget to finance new infrastructure.

Transport

The entire Albanian transport system needs rejuvenation.Adequate roads, ports, and international airport facilities areprerequisites for developing a domestic market economy,encouraging foreign investment, and promoting tourism.Improved transport services will be important for the transi-tion from central planning to a market-driven economy.

Acknowledging the deficiencies in the sector, the govern-ment hlas established several priorities, including restorationof the limited road system, modernization of Durres Port andRinas (Tiran) Airport, and, ultimately, construction of newroads and highways. The World Bank is supporting these pri-orities through the Transport Project. Cofinancing from exter-nal sources has been mobilized by the Bank. In addition,World Bank projects in agriculture are targeting improve-ments in rural transport.

Roads

Until 1991 ownership of private vehicles was prohibited. Afterthe ban was lfted, the number of automobiles rose, by morethan one-third between 1991 and 1992 alone. Initially, a seri-ous policy mistake was made by allowing vehicle importationwith virtually no tariff payments. This was corrected, andbeginning in early 1993 a minimum tariff of $400 per vehiclewas levied, bringing revenue to the state budget from a seg-ment of the population that can afford to pay. Ih 1994 the ratewas increased to $500 per vehicle. The road network requires

19

Rehabilitating ThansportThrough an $18 million transport project, approved in May 1993, theWorld Bank is financing the rehabilitation of about 80 kilometers ofmain roads, as well as repairs to the port of Durrbs, and will providetechnical assistance for the implementation of a transport policy.

Ib facilitate the marketing of agricultur-al production and to pro-vide services and employment to the poorest segment of the Albanianpopulation, the World Bank is preparing another project that willfinance the construction of 1,500 kilometers of rural feeder roads.

"Preparing the first set of bidding documents was not easy. After all,nobody in Albania had the slightest experience in international com-petitive bidding or World Bank procedures. The Ministry of Transportwould, of course, like to be as ambitious as possible, because theneeds are immense. On the other hand, budgetary resources areextremely tight, and inflation must be kept under control. The chal-lenge for all of us, Albanians and World Bankers working on trans-port, is to choose the most urgent priorities and to implementeffectively at the lowest possible cost. It will be an ongoing struggle."

Luis Rewaelta, task manager, First Transport Project

rapid strengthening to support the increased number of vehi-cles. Some major roads still in use today were built by the Aus-trians, Germans, and Italians during World War II; however,few repairs were undertaken after completion.

Albania has a road network of 18,000 kilometers-2,900kilometers of paved and 4,900 kilometers of unpaved roadsadministered by the central government and 10,200 kilome-ters of minor roads managed by local governments. Repairsare being made on almost half of these roads. About 400 vil-lages, with a combined population of 1 million-nearly one-third of the total pcpulation-are inaccessible to motor vehi-cles for at least part of the year. With the World Bank's sup-port, the government plans to improve feeder roads to theseremote villages to facilitate transport of goods to market andprovision of services.

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Some progress in private sector development is alreadyapparent. Newly privatized enterprises are providing intercitybus connections and trucking services. Road repair and con-struction are being carried out on a commercial basis by state-owned enterprises and joint ventures. Encouiraging the privatesector is a priority for the government and is proving to be animportant element of revitalizing transport services.

Seaports

The disruption of transport lines through the former Yugosla-via., coupled with the ina 'equacy of the road system, necessi-tates greater reliance oin seaports, which afford the mostsignificant access for both imports and exports. Albania hasfour operational ports: Durres, Vlore, Sarande, and Shengjin.

Durres, Albania's second largest city, was in Roman timesthe most important port on the eastern shore of the Adriatic;there, people and merchandise began their eastward trip tothe Orient. Today Durres handles approximately 85 percentof Albania's port traffic. Yet, as Zafer Ypi, director of the Port ofDurrts, points out, "the port facilities are in desperate needof improvement.' New equipment, berths, suorage facilities,and training for workers are needed. Although exportsthrough Albania's ports have dropped as a consequence of thedecline in output from 1990 to 1992, overall shipping at Dur-res has increased owing to the large amount of imports andaid deliveries and the use of port facilities by neighboringcountries.

Under the World Bank Transport Project and with cofinanc-ing from a Kuwaiti government fund, the port authority isimproving the facilities. At present, few cranes for loading andunloading cargo are operational, storage facilities are limited,and no ferry terminal exsts. Since grain imports are expectedto continue at high levels over the next decade, silos and otherstorage facilities must be constructed. When financing isavailable, a ferry terminal will be constructed to providegreater tourist access to the country.

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"It Is Not Easy to Adjust. ..'"e lived in a socialist system for years, and it is not easy to adjustquickly to free market conditions. Therefore the World Bank projectis very valuable for us since it will help us improve our technical andadministrative capabilities to handle the increasing traffic at theDurres port. Other parts of the project will help supply the basic han-dling equipment, containers and storage facilities, [which] is impor-tant because Durres is and will be a very important port in theBalkans.

"All these efforts will, of course, require us to change our mentality,work very hard, and increase not only the quantity but also the qual-ity of port services. In this respect, the World Bank is also helping usto develop a master plan that will put our long-term efforts into per-spective and help us effectively design the future development of theport of Durrds."

Zafer Ypi, director, Port of Durris

Improvements financed with fumds raised by the portauthority and from external sources (including the WorldBank Transport Project) will make it possible for Durres tohandle at least 3 million megatons of bulk cargo and 1.4 niil-lion megatons of general cargo per year, enabling the port tofulfill Albania's needs through 2000.

Vlor6, the second largest port, is the primary fishing portand handles oil exports. Whereas iiunds for modernizing theDurres port will be raised through the autonomous portauthority, any improvements at Vlore will be financed pri-vately, either by the emerging private fishing industry or byprivate oil companies. Under the previous government, planswere under way to build a new facility a few miles from theexisting ones. In view of current budgetary constraints andprivatization efforts, funds to complete the Vlore port shouldnow be raised through the private industries that use thisfacility.

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CivilAuvation

Tirant's Rinas Airport was constructed to accommodate mini-tmal passenger traffic. But the number of flights has increasedfrom about two a day in 1990 to nine or ten flights a day in1993, and the number of passengers from 50,000 to 130,000 ayear. As the only civil aviation facility in the country, the air-port must be upgraded to provide adequate services to passen-gers. As a start, the air terminal has been updated to betterprocess the increased traffic. Meanwhile, plans for strengthen-ing the runway, installing runway lighting and navigationequipment, and making more extensive improvements in theterminal, apron, and taxiway facilities are being assessed.Future investment plans in civil aviation include opening upthe ten military airports for internal civil aviation operations.

Says Ferdinand Petrela, director of Albtransport, a joint-venture civil aviation agency, 'We need to reconstruct the[Rinas] airport to improve the services and tackle this dra-matic increase in traffic.... As a result, we prepared tendersand accepted an offer for reconstruction, which is scheduled tobegin as early as March 1994."

Railroads

The Albanian railway system, operated by the Ministry ofTransport and Communications, receives large operating sub-sidies from the state budget. Railroads had been a majormeans of passenger and industrial transport, but in February1992 passenger services were closed because of safety concernsstemming from the breakdown of public order. Subsequently,with the collapse of state enterprises, rail transport was notrequired for industrial goods, either. For almost eighteenmonths the railways remained closed; there were not enoughgoods to be transported and the increase in private vehiclescut into demand for passenger transport. The government isassessing various strategies for the future of both industrial

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and personal rail services. Plans to link Albanian railwayswith those in the Former Yugoslav Republic of Macedonia (nmMacedonia) and in Greece have been postponed pending evalu-ation of the possibilities for cost recovery.

Other Transport Challenges

Currently, the governments of Bulgaria, Ff1 Macedonia, Tur-key, and Albania are assessing the possibilities for strengthen-ing east-west transport links. Albanian ports would serve asthe Adriatic outlet for goods from these countries. Althoughthe project is long term, Albania will start work on some seg-ments of a new 'Via Ignatia" in 1994. (The Via Ignatia wasfamous in Roman times as the most direct link between Romeand Byzantium.) Once the road is completed, the travelingtime from the border of nr Macedonia to Durres port could beonly a couple of hours, against more than four hours on theunimproved roads.

During 1993 the Albanian government focused on rehabili-tation of roads, ports, and the international airport while mov-ing caLutiously on new investments throughout the transportsector. Particular attention is being given to the cost of main-tenance of both improvements and new investments. Exten-sive road and airport rehabilitations are planned for 1994.

Water, Sanitation, and Energy

Development of water, sewerage, and energy services forhomes and industries wil improve living conditions, encour-age private sector development, and facilitate direct foreigninvestment. Among the significant accomplishments of theCommunist years was that many urban homes and all indus-tries were connected to water, sewerage, and electricitycenters operated by district governments. About 95 percentof rural villages are connected to local water and electricitysupplies.

Albania has the potential to become a significant exporter ofelectricity and has abundant underground and surface water

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supplies. The challenge is to ensure that these assets are usedefficiently by households, agriculture, and industries. In theirconsultations with the government, World Bank staff have rec-ommended that decisions on investment in the water, sewer-age, annd energy sectors take into account the potential forrecovering investment costs and that explicit budgetary subsi-

Bringing Water to People'lb improve. water services mn Albanias second largest city, the WorldBank and the Albanian government formulated the Durres WaterSupply Project. Says Richard MacEwen, the task manager for theproject, 'The Durres Water Supply Project will restore 24-hour ser-vice to existing water consumers in Durres and surrounding commu-nities which now only have water an average of four hours each day.The project will accomplish this through rehabilitation of existingpipes without undertaldng major investments in production capac-ity' Current losses through leakage are estimated at 50 percent, andif production capacity were inceased without rehabilitation, leakagewould approach 75 percent of production. The project also indludescritical repairs to sewerage systems in Durres district and technicalassistance to strengthen the management of organizations in the dis-trict responsible for providing water supply and sewerage services. Itwill benefit about 200,000 citizens in the area.

Local offidals preparing the Dunes Water Supply Project

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dies be targeted only to the poorest regions or segments of thepopulation.

The great public demand for water and electricity makes itdifficult for these antiquated systems to keep up. Leaks inwater pipes are causing contamination, sewage is being dis-charged without benefit of treatment, and electrical equip-ment is significantly damaged as a result of the overloading ofdistribution systems. Existing water and electricity distribu-tion facilities require repairs to undo the intentional damageincurred during the revolution and the general lack of mainte-nance in previous years.

Water and Sanitation

Despite its plentiful water supplies, Albania is having todevelop strategies for supplying sufficient drinking water toits population. For most households, water is available onlythree to four hours in the day because of leaks in poorly main-tained distribution networks and mass water storage byindustrial enterprises. Iladequate water supply, chlorinationfacilities, and sewerage service, especially in urban areas, area risk to public health, an impediment to economic growth,and a source of great hardship for the pop-lation.

The central objective of the government in the water andsanitation sector is to ensure that the country's limitedresources are used in the most efficient manner. The WorldBank is providing assistance to the government under theDurrts Water Supply Project, which is designed to eliminatewater shortages, improve management, and repair seweragecollection systems through rehabilitation of facilities in thedistrict of Durres.

Energy

The autonomous agency for electricity distribution has carriedout repairs to the distribution network- and is installing newmeters to replace those damaged during the revolution. Alba-nia's electricity distribution and transmission networks are

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badly overloaded as a result of quadrupled consumption byhouseholds and a significant increase in the use of electricityby newly established small commercial entities since 1989.The entire power sytem urgently needs to be strengthened.

Richard Hamilton, the World Banks task manager for thePower Loss Reduction Project, says, 'The cost of rehabilitationand reinforcement in electricity will be high, and paying for itwill require eliminating the widespread unbilled use of elec-tricity and greatly increasing electricity prices.' The WorldBank team has been working closely with the Ministry of Min-eral Resources and Energy and the Albanian Electricity Cor-poration (KESH) to help the government define a strategy forthe energy sector. Under the Critical Imports Project, theWorld Bank financed urgent repairs to hydropower stationsand electricity transmission and distribution networks. ThePower Loss Reduction Project, under preparation by the gov-ernment and the Bank, will provide KESH with financing foran action plan that will reduce the unbilled consumption ofelectricity. A project under consideration would support therehabilitation, upgrading, and expansion of the transmissionand distribution networks.

Albania was a net exporter of oil until 1989, but then pro-duction fell by about 50 percent. The government is activelyexploring ways to increase oil andc gas production to the earlierlevels. At the request of the government, the Bank has pro-vided experts to advise on ways of encouraging private partici-pation in the sector while ensuring that the rents fromAlbania's oil resources benefit the country. Large internationaloil companies are considering offshore and onshore explora-tion in Albania, as well as enhanced oil recovery agreements.Such investments would bring about a significant increase inoil production.

Energy sector reforms are important on at least two counts.First, for the macroeconomic health of the country, implicitand explicit subsidies should be reduced to ensure rationalpricing and efficient allocation of resources. Second, increasingthe supply of electricity for heating and other household usescould help stem or reverse environmental degradation caused

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the Housing Sector MUust Be Privatized'"When we took office, we defined our new policy [in housing] in twodimensions. Economically, we decided that the housing sector mustbe privatized. We prepared the environment for every Albanian to beable to buy and sell building materials, build houses, and sell them atmarket prices. Socially, the government decided to assist those peoplewho are not capable of buying houses in the market, particularlyabout 10,000 ex-prisoner families, about 10,000 families who had toleave their houses as a result of restitution, and those with incomesbelow the minimum living standardsf.

Adem Duka, general diector of housing,Ministry of Construction, Housing and &rritory Adjustment

by random cutting of trees for fuelwood. 'lb assist the govem-ment with strategies for dealing with the energy sector, theWorld Bank has financed an Energy Sector Study. Projectsbased on the findings of the study are in preparation and, withcofinancing from otner sources, may help Albania develop itsconsiderable energy resources in the most effective way.

Housing

Albanian housing standards are low compared with those inother countries of Eastern Europe, and dwellings are typicallyovercrowded, often with three or four generations residing in asmall flat. An estimated one-third of the country's 675,OCOdwellings have no piped water. There is virtually no centralheating in the flats. and practically no maintenance on state-owned housing has been undertaken since construction.

Although some citizens, particularly in rural areas, wereallowed to retain their homes during the Communist regime,more than 70 percent of urban housing was expropriated bythe state. The government put all public housing on sale tooccupants in the spring of 1993. Prices were kept low-approx-imately $100-$150 for a small flat-and a choice of paymentplans encouraged a large number of tenants to purchase theirapartments. Revenues from apartment sales are earmarkedfor use by the National Housing Agency to finance the comple-

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tion of uinfinished flats, which are then sold to private house-holds or local authorities.

Ib alleviate the housing shortage and improve the quality ofthe remaining stock, the government intends to enlarge therole of the private sector. Policies have been designed toencourage the development of a private housing marketthrough privatization of state-owned housing, the develop-ment of a real estate market, and improvement of auxiliaryinfrastructure such as electricity, heating, and water distribu-tion. The state-owned housing stock, reserved for those whocannot afford to purchase their flats, is also being imnproved.

Telecommunications

Telecommnunications access-a luxury not available to manycitizens during the previous regime-is important for marketdevelopment and improved living standards. As part of a gen-eral strategy for expanding telecommunications, operationalcontrol of telecommunications has been transferred to AlbaniaTelecom- Although there are no immediate plans to privatizetelecommunications, Albania ITlecom is seeling joint venturepartners to provide funding for updating the system.

In 1992 there were only 46,000 telephone connections inAlbania (1.4 connections per 100 persons), and there was awaiting list of 30,000 households. Most telephone calls aremanually connected. Microwave transmission is used betweenTiran§, Shkod&r, Gjirokast6r, and Korce, and there are inter-national radio connections with Greece and Italy.

The World Bank has provided some technical assistance intelecommulnications but has left financing of the sector to theEuropean Bank for Reconstruction and Development (EBRD).The first EBRD-supported telecommunications project is nowbeing implemented.

Albania is changing very quickly. New roads, improved elec-tricity and water service, and modem conveniences are visibleto Albanians and foreigners alike. The continued dedication. of

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Providing Living Space"The relations between the Ministry and the World Bank have reallybeen impressive. Without doubt, the contributions of all the WorldBank employees have been extremely valuable. The Housing Projectis going on very well, with 97 percent of total housing stock privatizedand the establishment of the National Housing Agency. However, weperceive the achievements so far as too few compared to the overallneeds of the housing sector in Albania.... In the future, we hope tofind more funds to enable us to make new investments."

Ilhr Manushi, minister of Housing, Construction and Territory Adjustment

In the sumrnmer of 1992, during a dinner attended by Albania's Presi-dent Sali Berisha, Ilir Manushi, the minister responsible for housing,and Kemal Dervi§ of the World Bank, the subject of housing arose.Concerned about the large numbers of half-fmnished housing unitsand the resulting housing crunch, President Berisha told Kemal Der-vi~ that completion of the 13,000 dwelling units under constructionwas an overriding priority for the government and that privatizationof publicly owned flats was aiso urgent. The eventual outcome of theconversation was the World Bank Housing Project.

Design and implementation of the project were the responsibility ofMinister Manushi and his team. Task manager Gian Carlo Guardafrom the Bankls Infrastructure Operations Division was responsiblefor putting together the project on the World Bank side. He soughtand obtained substantial professional support from the Office ofHousing and Urban Programs of the U.S. Agency for InternationalDevelopment.

Ultimately the project had three components. First, because a pri-vate housing market was a priorty, the government concentrated onselling existing rental units to residents. Second, at the same time,the World Bank financed the completion of public housing units, theconstruction of which had been interrupted because of lack of funds.These units are being privatized immediately after completion of thework. The third part of the project, financed by a USAID grant, pro-vides technical assistance to the National Housing Agency for theimplementation of the project and for strengthening its institutionalcapacity.

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"I was amazed at the speed of housing privatization, which began inMay 1993 and was 97 percent complete by November. MinisterManushi!s prediction was correct, and in six months most Albaniansowned their flats. Now we are seeing the beginnings of a private realestate market.... Maybe because of the Albanians' spirit of entrepre-neurship or possibly because of fear over inflation, Albanians werewilling to invest savings in their residences."

Gian Carlo Guarda, World Bank

Residential buildings being completed under the World BankHousing Project

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Albanian authorities to improving infrastructure will encour-age the development of a modern market-oriented society byproviding improved living conditions for the Albanian popula-tion and making the country more attractive to foreign inves-tors. Ibgether, the government's dedication and the support ofthe World Bank have contributed dramatic improvements toone of the country's most important sectors.

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UAGRICULTURE

Traditionally, the foundation of the Albanian economy hasbeen agriculture. Since 1990 farming and livestock productionhave been in a deep depression, but basic restructuring hasnow put them on a path toward recovery. The Albanian revolu-lion was an arduous two-year process that saw state farmsand agricultural cooperatives break apart, initially becauseworkers refused to till the land and later through privatiza-lion. The process was exacerbated by the disintegration ofagricultural infrastructure and distribution networks.

The total collapse of the old system offered a window ofopportunity to begin reviving the most important sector of theeconomy. The new government assessed ways of restructuringthe sector to promote the development of a market economyfor agricultural products. Building on the initial privatizationof agricultural cooperatives, which began in the summner of1991, the first steps were to liberalize the prices of most foods(except bread) and to allow local farmers to compete with foodaid being sold in the market. In late 1992 the governmentadopted a medium-term reform program designed to promoteagricultural growth and development. Both the World Bankand the European Union assisted the government in prepar-ing this program, which was published as a World Bank reportentitled An Agricultural Strategy for Albania.

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Agriculture under Communism:Thle Legacy of Ultracentralization

Under communism, Marxist ideology ruled agriculture. All land wasstate owned or was clustered into state-dominated agricultural coop-eratives. The 250 state farms, most of them located in the coastalplains, occupied 25 percent of the arable land and employed a workforce of approximately 150,000. They accounted for 30 percent of totalproduction and for a much greater share of the marketed surplus.

Marketing of inputs and outputs was fully controlled by the state,and prices and subsidies were set with no relation to costs. No free-dom of labor movement, either within the rural areas or betweenrural and urban areas, was permitted. The country was self-sufficientin agriculture, but at a high cost that eventually became unbearablefor the economy and contributed to the collapse of the economic sys-tem at the end of the 1980s. The final breakdown of agricultural pro-duction and markets was followed in 1990 and 1991 by considerabledestruction of buildings and equipment in rural areas.

Tbday the entire state-owned agricultural marketing and process-ing sector is in a distressed situation. With factories working at 5 to20 percent of their 1989 capacity, operations are highly inefficient,incurring large losses and debts. The declines in output and theincreasing subsistence orientation of farmers have cut deliveries toagroprocessing enterprises. In 1992 only 5 percent of private farmersdelivered part of their wheat to the grumbullimi-purchasing centerscoupled with large milling and storage facilities-because most pro-duction was kept for household use.

The tentative reform efforts made during the 1980s in the othercountries of Central and Eastern Europe and the former Soviet Unionwere much less evident in Albania. As a result, Albania faces theneed for a very abrupt agrarian transition. A labor-to-land ratio thatis unusually high for the region has created special problems for thedesign of the reform. Albania has about 1.4 hectares per worker (inBulgaria the figure is 10.5 hectares). This means that not much agri-cultural land is available to support the rural population, but oppor-tunities outside agriculture are also limited because of theundeveloped state of the rural economy. Thus workers who are dis-placed from agriculture to other sectors have great difficulties in find-ing gainful employment. Prospects will improve as new privateactivities develop throughout the economy.

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"A Great Future"

"Agriculture is, of course, the most important sector of the Albanianeconomy, and restructuring is a great challenge. The results achievedso far are impressive, with full privatization of the lan-d and an excel-lent recovery of production. I am very struck by the ingenuity of theAlbanian farmers. There will be a great future in many areas of farm-ing in Albania, and the farmers are clearly beginning to take advan-tage of that. . . . I am very optimistic about the success of ouragriculture projects in Albania. Our projects will support thestrengthening of private agriculture, improve infrastrrnture, sustainefficient pricing policy, and provide credit to farmers.

Rory O'Sullivan, chief Agriculture and Water Supply Operations Division,Country Department HJ, Europe and Central Asia Regional Office, WVorld Bank

The Rural Poverty Alleviation Project will help zmprove villageinfrastructure. Here, residents of Lezhie meet to discuss their vil-lage's needs with the World Bank's Rory O'Sullivan.

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Cmnscious of the a aportance of this sector to the Albanianeconomy, the World Bank has placed special emphasis on agri-culture since the beginning of its operations in Albania. So far,results have been very encouraging, and Albanian farmersseem well placed to make good progress.

Although agriculture is the most important sector of Alba-nia's economy, only 32 percent of the land (700,000 hectares,mostly in the coastal plain region) is arable. The most impor-tant field crops are wheat and maize, and as much as 60 per-cent of the farmland is equipped with irrigation facilities.About 410,000 additional hectares are used for pasture. Esti-mates indicate that two-thirds of Albanians live in the ruralregions and that in 1990, when the revolution began, approxi-mately half of the labor force was engaged in agriculture.

In the 1980s agriculture registered an average growth of 2.6percent per year and accounted for approximately 35 percentof GDP. But between 1989 and 1991 output suddenly fell by 20to 30 percent. Only the presence of large humanitarian pro-grams-particularly Operation Pelican, a large food aid anddistribution program sponsorec by the Italian government-prevented widespread famine during the winter of 1991-92.

Even though Albania's transition began late, agriculturehas progressed more quickly there than in most of the otherreforming countries in the region. In 1993 agricultureaccounted for 50 percent of the country's GDP, partly because ofthe collapse of the industrial sector. Agricultural productiongrew 18 percent in 1992 and close to 15 percent in 1993.

Given the depth of decline in. the agriculture sector, theearly successes are remarkable. But if progress is to be sus-tained, furither reforms in land policy, infrastructure and ser-vices, and pricing policy will be required.

Land Policy

Land distribution has been the cornerstone for agriculturalreform, and the early successes in agriculture have been basedon the integration of the private sector into the production anrddistribution of farm products. As Albania moves into the second

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phase of agricultural reform, the government must develop asystematic means of distributing land titles and a new legalframework for property rights, land sales, and land leasing.

Land distribution began in the summer of 1991 under thecaretaker government of Prime Minister Ylli Bufi, with theapportionment of some agricultural cooperative holdings toprivate farmers. The process was disorganized, and somepeasants, eager to obtain the best land at once, began stakingplots of land without official sanction. Others reclaimed farm-land expropriated from their families by the previous regime.With the installation of the reform program under the newgovernment, the distribution process was reorganized, a pre-liminary land-titling system was introduced, and compensa-tion of former landowners began.

Beginning in July 1992, the government transformed moststate farmland into private holdings through land leases toemployees. About 10 percent of former state farmland is beingretained by the government to be managed by joint ventureswith foreign companies or as state property to be reclassifiedas pastures. The leases were distributed on an egalitarianbasis to entitled persons; the average area distributed per cap-ita was between 0.2 and 0.3 hectares. The fixed assets andworling capital of state farms are being sold, and sales reve-nues are being used to repay loans extended to state farms bythe Bank for Agriculture and Development.

Progress in titling former agricultural cooperative holdingshas been slow, as no local expertise in recording, displaying,and protecting property rights exists. Further confusion arosebecause of 'land grabs' by peasants earIy in the privatizationprocess. Lessons were leared, and titling has been more orga-nized for state farms. As of December 1993, 81 percent of theformer state farmland and 96 percent of former cooperativeland had been distributed, mostly through issuance of a pre-liminary lancd title, or tapi.

On April 22, 1993, the parliament promulgated a law tocompensate landowners who had received none or only part ofthe agricultural land that was in their possession before 1946.Previous owners of up to 1,000 hectares are to be compensated

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with vouchers tradable for cash or at face value in future salesof state-owned enterprises. A former owner or heir who isentitled to a parcel of 15 hectares or less is to receive fill"compensation for that land. For parcels of between 15 and1,000 hectares, owners and heirs receive compensation onx adecreasing-scale basis. No prior owner or heir may receive fullcompensation on more than 46 hectares. The value of thevouchers is to be fixed by the Council of Ministers, and the dis-trict offices of the State Council of Compensation will imple-ment the compensation scheme.

To avoid a chaotic and unregulated land market, the govern-ment has decided that sales of agricultural land in a given dis-trict will be allowed when the land registration system is inplace and all claims for compensation by former owners havebeen resolved. As land registration systems are establishedand land title documents properly recorded, the governmentplans to sanction sales on an ever-widening basis, district bydistrict, until transfers of agricultural land throughout theentire country are permitted.

An urgent need for Albania is the development of a legalframework for property fights. Leases, mortgages, and userrights must be defined by law in order to provide sufficientincentives for owners and users to improve their properties.The government is paving the way for land markets by draft-ing legislation for property rights and responsibilities, estab-lishing a land distribution system, and developing a cadastre.These actions are supported througn technical assistance com-ponents of the World Bank-financed Agriculture SectorAdjustment Credit.

Agricultural Infrastructure and Services

The greatest challenge to agricultural reform now is to createan environment that will encourage the newly emerging farm-ers to market their products and to specialize according tocomparative advantage. This will require significant restruc-turing and rehabilitation of the agricultural infrastructure,including irrigation and drainage systems, agricultural equip-

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ment, electricity supplies, and marketing provisions, as wellas such agricultural services as credit, research facilities, andagricultural extension services. Although significant gainshave already been recorded in agricultural rehabilitation,these challenges must be addressed to ensure long-term via-bility in the sector.

The World Bank has worked with the government on theproblems of insufficient rural infrastructure and inadequateaccess by individual farmers to credits and other services. TheRural Poverty Alleviation Pilot Project is rehabilitating agri-cultural infrastructure, particularly rural roads and verysmall irrigation systems, and providing small credit s to indi-vidual farmers for purchasing livestock and fertilizers. Morethan 120 rural infrastructure projects are under way in seven-teen districts. The projects range from rehabilitation of roadsand small irrigation systems to repair of schools and healthclinics. In addition to their other benefits, these activities cre-ated thousands of jobs. About 35 village credit funds havebeen establiished, and 1,100 small loans averaging $300 havebeen disbursed to farmers and small entrepreneurs. The pro-gram is to be expanded nationwide. (See the next chapter for afurther description of the project.)

The Agriculture Sector Adjustment Credit (ASAC) supportsthe government's reforms in agriculture, particularly in pricing,privatization of state-owned agricultural enterprises, distribu-tion of state farmland, and reorganization of the agriculturalbank. ASAC provides a quick-disbursing credit to financeimports in the agriculture sector, as welA as a credit line forprivate farmers and farmers' associations. It also financestechnical assistance to the agricultural banking system.

Agricultural infrastructure has deteriorated because ofchronic lack of maintenance, followed by destruction duringthe 1990-92 revolution. Between 1991 and 1993 the irrigatedarea decreased from 60 percent of arable land to about 11 per-cent. With less than 20 percent of rainfall occurring during theperiod from April through September, irrigation is essentialfor agricultural production in many areas. It is all the morevital now since the inception of land reform, because of the

39

Smallholders in northern Albania talk about the wheat harvestwith World Bank officers

urgent need to increase productivity on the small privatefarms that have emerged.

The main water sources consist of about sixty-five reservoirs(accounting for 42 percent of the water available for irrga-tion), pumping stations with lift irrigation (18 percent), andrun-of-river schemes (40 percent). A major effort to put exist-ing systems back into operation is planned through a proposedirrigation rehabilitation project currently being prepared forpossible IDA financing.

Private sector activity is developing rapidly in agriculture-related activities such as output marketing, input supply, foodprocessing, rental of tractor services, and workshops. How-ever, private business competes on an unequal footing withstate-owned enterprises, rwhich until recently had privilegedaccess to state-guaranteed credit and continue to receive thebulk of food aid shipme nts and donor-financed agriculturalinputs. Lack of capital and of management skills also puts pri-vate firms at a disadvantage and can slow the development ofprivate sector activities, particularly in rural areas.

Agricultural services, including access to credit, extensionservices, and research facilities, are prerequisites for the fur-ther transformation of the agricultural sector. The increasing

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Preparing the Irrigation Rehabilitation ProjectIn Albania irrigation is needed in the dry months between spring andautumn, while drainage is required to prevent flooding in low-lyingland during winter. The World Banlks Irrigation 'RehabilitationProject, in preparation since the fall of 1993, concentrutes on repair-ing the existing irrigation and drainage infrastructure and reorganiz-ing the water distribution mechanism in selected high-potentialdistricts. Among the goals of the project, scheduled to start in mid-1994, is to support the establishment of water user associations.

Albania's irrigation and drainage infrastructure is impressive in itscoverage-about 60 percent of the arable land has been placed underirrigation and drainage since the beginning of this century, saysMichael Koch, the World Bank's task manager for the project. How-ever, inadequate maintenance and the social upheavals following thedemise of communisin in 1991 caused substantial damage to the sys-tems, and in 1993 the actual irrigated area was a mere 11 percent ofarable land. With simple and inexpensive investments of no morethan $500 per hectare, it will be possible to rehabilitate many viablesystems in the fertile areas along the coastal plains.

"The real challenge for Albanians and us World Bankers is to ensuregood maintenance of repaired systems in the future. Creating huu-dreds of local water user associations and reforming inefficient stateirrigation utilities are the key tasks in order to achieve that goal.Luckily for us, the Albanians had already developed a draft irrigationcode which we quickly helped to review and revise. This code nowprovides a good basis for the proposed Irrigation RehabilitationProject; it clearly defines the gradually reduced role of governmentand the increased responsibility of farmers in irrigation manage-ment, which is precisely the way to go for the future."

Michael Koch, project task ranager, World Bank

demand by private farmers for financing to purchase urgentlyneeded inputs and mechanized equipment has so far been metlargely by external assistance from many donors. In the past,formal credit was supplied by the Bank of Agriculture andDevelopment, which has a network of 27 branches and 160rural agencies. This bank is currently being liquidated. The

41

new Rural Commercial Bank (RCB) has been legaly estab-lished as a commercially operating successor institution thataims at meeting the credit requirements of smallholders, trad-ers, and the privatized agroprocessing industry. The RCB,which received its license in 1993, is being supported by theAgriculture Sector Adjustment Credit.

The research system in Albania's agriculture sector consistsof seventeen research institutes that work on applied or basicresearch. Past research was commodity based, with no socio-economic analysis, andc consequiently has little relevance to thenew farming environment. Research stations are run-downand lack essential equipment and machinery.

Banking for and on Smnll Farmers

'We are the first bank in Albania to work with European standards.The Bank management is free to make decisions on giving credits,and 98 percent of our credit goes to the private sector, mostly tosmailholders and traders of agricultural inputs and outputs. Thetotal amount of credit we provide is about 2 billion leks. Overdueloans are only 11 percent, compared with other banks, which have anaverage of 40 percent delinquency. Recently, we are trying to improveand increase services to our customers. For example, we are now ableto transfer money abroad. We established relations with banks inEurope and the United States. The RCB has 35 district branches,about 160 agencies, and about 500 employees. Our network is the big-gest in Albania, andc we cover the whole country.

"Within our bank, we have six consultants financed by the WorldBank, helping us in all areas of banking, from financial services,accounting, and credit to international banking, administration, andhuman resources. Tney work very hard and cooperate closely withthe Albanian staff of the RCB. With the asiistance of these consul-tants, we have made a lot of progress in one year. I appreciate verymuch our governmenets intention and the World Bankes assistance inrestructuring the banking system. It is now our job, as bankers, tomake this effort survive and deliver its results."

Orfea Dhuci, vice executive officer, Rural Commercial Bank

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The Ministry of Agriculture and Food operates a basic agri-cultural extension network. In the past the role of this systemwas to ensure that farm production could meet centrally setproduction targets and to transfer technical recommendationsfrom the research stations. The existing extension system hasto be reoriented to take into account the new structure of landownership and the emergence of private farmers.

The govenmnent will persevere in its efforts to establish anadequate legal framework for property rights and local admin-istrative capacities for agriculture-related public sector ser-vices and to develop the private sector in agriculture. No areaof the Albanian economy is more important for long-term via-bility of economic reform. The World Bank and the govern-ment will continue to finance agriculture-related investmentprojects to ensure sustainable progress in the sector.

Price Policy

Ib encourage a supply response in agriculture, Albania hasadopted a medium-term price policy that the World Bank issupporting through the Agriculture Sector Adjustment Credit.The main objective of this policy is to ensure an efficient allo-cation of resources by increasing the prices for domestic prod-ucts to approximate world market levels, sustaining thepricing of food aid at import parity levels, and eliminatingdirect subsidies on domestic products In addition, privatetrade in agricultural products is being encouraged through theremoval of price ceilings on privately imported goods, the elim-ination of export licensing, and the contracting of the process-ing and distribution of food aid to private operators. The newprice policy is supported by privatization of state-owned mar-keting and processing enterprises. Increased private sectorparticipation is expected to help restore the marketing andprocessing networks and provide incentives for increasedagroimdustrial production.

During the period 1989-91 domestic production of wheat fellfrom 613,000 tons to 270,000 tons, causing particular hard-ship because bread is the main staple food. For bread and

43

other staples, Albania became mostly reliant on internationalhumanitarian assistance. At first, in an effort to avert wide-spread starvation during late 1991, food aid was either givenaway or sold at prices far lower than those of local products.Once an economic reform program had been adopted by theMeksi administration, the government began to sell food aidat world market prices, hoping to encourage production bydomestic private farmers.

Agricultural output prices were liberalized in various stagesbetween late 1991 and 1993. On January 15, 1993, all pro-ducer, wholesale, and consumer prices were liberalized, withthe exception of prices for bread, wheat, and sugar beet. InJuly 1993 all prices were liberalized. In practice, however,market prices are heavily influenced by the prices at whichfood aid imports are sold. In June 1993 the government decidedto raise the price of wheat provided through food aid to 16 leksper kilogram while raising the price of domestically producedwheat to 14 leks. This step has brought domestic output pricescloser to world levels and has given millers an incentive topurchase wheat from domestic producers. The price of breadhas consequently risen to cost-covering levels, while subsidiesfrom the state budget protect the poorest families.

In addition to wheat, food aid shipments include vegetableoil, sugar, rice, meat, powdered milk, butter, cheese, and eggs.While consumer prices of food aid sugar ancd rice have been sethigher than import parity levels, prices of meat and dairyproducts were set about 10-20 percent lower. The governmentintends to set food aid prices at import parity levels to avoiddiscouraging private imports, but because of health and nutri-tion considerations, i will do this gradually, over a period oftwo to three years.

Fisheries and Forestry

Among Albania's potentially important but often overlookedresources are fisheries and forests. Soil and climate conditionsare ideal for the development of the 1.04 million hectares offorestland (38 percent of the total area), and Albania's 500

44

r -/

Ari,~~~~~'-.s y a8 -n

* _ ;( A , v i

The fsh market, 7lrani

kilometers of coastline and vast inland lagoons, freshwaterlakes, and reservoirs offer opportunities for developing thefishing industry. Realization of this potential requires theadoption of a legal framework for administration, manage-ment, and environmental protection.

The main priorities of the government in the fisheries sectorare to establish a fisheries management and protection serviceand to promote private investment in fishery enterprises andin local fish marketing facilities. Albania's sustainable annualmarine fish catch is estimated at between 7,000 and 8,000tons. By the mid-1980s the fishing industry exported about3,500 tons of canned sardines and 2,000-3,000 tons of demer-sal (bottom-dwelling)1 species each year, valued at approxi-mately $10 nillion a year.

45

Environmental Protection and Managementof Natural Resources

Albania's rich endowment of natural resources is threatened by inad-equate protection and management. Partly as a consequence of mea-ger industrial capacity in the past, the expansive coastlines andsplendid mountains have escaped great damage; considerably lessenvironmental destruction has occurred than in other Central andEastern European countries. Nonetheless, past environmental mis-management has led to soil erosion, deforestation, water contamina-tion, and loss of biodiversity.

Post-Communist Albania understands the necessity of establishingand meeting standards for environmental protection. But resourceconstraints dictate that the country will have to focus on preventingfurther degradation rather than remedying past environmentaldamage. The governmenes strategy emphasizes strengtheningthe Committee for Environmental Protection and Preservation(CEPP) and the legislative and policy framework for environmentalmanagement.

The strategy includes short-term plans to eliminate subsidiesfor fuelwood, electricity, coal, and water, thereby curtailing irrespon-sible private and pubEc use of the resources. In addition, the CEPPwill drafl legislation to encourage envirornmental protection, particu-Iarly in the areas of water cquality, waste management, irrigationwater, forestry and coastal zone management. Longer-term compo-nents of the strategy include augmenting environmental monitoringthrough the CEPP, developing and implementing environmentalpolicy, and executing oversight responsibilities for environmentalprotection.

More effective management will enable Albania to maintain itsprecious natural resources. Thward this end, the World Bank hasassisted the government in preparing a National EnvironmentalAction Plan. The plan, finalized in July 1993, has received severalmillion dollars in donor commitments for follow-up actions.

Marine fisheries are concentrated at four main ports-Dur-res, Sarande, Shengjin, and Vlore. Privatization of the fleet of115 boats should be completed in early 1994. (By mid-1993, 20boats had been sold outright, and 45 had been purchased bytheir crews.) There is also an artisanal fishery that uses smallboats and is organizecd at the district level. Some development

46

of inland fisheries and aquaculture has occurred, with fivecarp-farming enterprises covering 450 hectares, a smaller 4-hectare trout farm, and nearly 80 mussel-producing units inthe Butrint Lagoon.

The situation in the forestry industry is somewhat morecomplex. Unchecked exploitation has led to environmentaldegradation in areas surrounding urban centers. During1991-92 random and unregulated harvesting of trees tookplace as families relied on fuelwood to heat their homes. Theserious erosion that resulted has permanently damaged andreduced the forest base, especially in the lowland shrub andcoppice forests. Inaccessible forests in the highlands have suf-fered much less degradation and offer good potential forimproved wildland protection and development of tourism.The challenge today is to protect the remaning forestresources and to plan for their future use.

The government's priorities will be the creation of a modemforest resource management service to oversee the efficientand sustainable use of Albania's forests, backed up by theprivatization of forestry and wood-processing enterprises andthe development of infrastructure. Tb buttress these reforms,the World Bank and the government are planning a forestryrehabilitation project to support the policy and institutionalreforms in forest management and the development of thelegal and inistitutional underpinnings for environmentally safeexploitation of Albania's forests. Other elements include theaccelerated replanting of devastated forests, the protection ofsome areas containing rare trees, the privatization of forestindustrial enterprises, and the expansion of Albania's forestresearch capabilities.

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ALLEVIATING POVERTY ANDSUPPORTING HUMAN RESOURCES

Even before the drastic output decline following the break-down. of the old regime, living standards for most Albanianswere well below the levels in other Central and East Europeancountries. In 1990 and 1991 massive social turmoil wasresponsible for the destruction of schools, health facilities,housing, and electricity and water distribution networks.Although the entire country suffered from diminishing stan-dards of living during the transition, the two-thirds of the pop-ulation who reside in the countryside endured the greatesthardships.

By March 1992, when the first non-Communist governmentwas elected, poverty in urban and rural areas had reachedunprecedented proportions. Within agriculture alone, forexample, a cumulative drop in sector output of 28 percent wasregistered during 1990-91, evidence of the depth of the eco-nomic recession and a partial explanation for the food short-ages, riots, and breakdown of general public order during thetransition. Once installed, the new government acknowledgedthe immense challenges presented by far-reaching economicrestructuring and the resulting social costs. Tb deal with thischallenge effectively in Albania, transformation to modern

48

economic practices, particularly within the public sector, wasrequired. Needs within the social sectors perhaps required themost attention.

Reforms in the social sectors have helped maintain a socialconsensus in favor of general economic reform. At the time ofthe government transition, the average Albanian was appalledat the quick economic and social disintegration of the coun-try-a consequence, in part, of uncoordinated policies in theprevious years. Widespread urban crime and scarcities of basicgoods such as bread, meat, coffee, sugar, and clothing contrib-uted to popular dissatisfaction.

Tackling the disparate needs of providing such necessitiesas food, housing, health services, and education to the popula-tion while sustaining social assistance programs and under-taking economic restructuring remains a major challenge forthe Albanian government. Albania's agrarian economy pro-vides the most important basis for alleviating poverty andensuring a sufficient food supply. At the same time, socialassistance programs must be overhauled andc expanded toensure a social safety net of last resort for the truly needy.

Two of the greatest accomplishments of the previousregime-practically universal access to primary health careand basic education-were undermined during the revolution.Many hospitals and schools were partially or completelydestroyed, and parents kept small children out of schoolbecause of the lack of adequate facilities and so that they couldwork in new family businesses. During the transition the gov-ernment has been concerned about rescuing health care andeducation from dilapidation. Ibgether, tlhe World Bank and thegovernment have developed reform strategies for education,health, the social safety net, and poverty alleviation.

Early World Bank lending to Albania targeted poverty alle-nation through revitalization of agriculture; the CriticalImports Project, the Rural Poverty Alleviation Pilot Project,and the Agliculture Sector Adjustment Credit were designedwith these goals in mind. As agriculture began to recover,greater emphasis has been placed on the need to transformthe labor market, develop social security, and rescue the edu-

49

cation and health sectors. The Labor Market Development andSocial Safety Net projects, approved by the World BanlksBoard of Executive Directors in September 1993, supportefforts to institute effective policies in the sectors. In healthand education, the World Bank first assisted with the develop-ment of sector strategies and now expects, through lending, torehabilitate primary schools and rejuvenate primary healthcare.

Poverty Alleviation

The Critical Imports Project (CiP), Albania!s first lending pack-age with the World Bank, was designed to encourage domesticagricultural production, rehabilitate electricity service, andstrengthen efforts to revitalize the economy and alleviate pov-erty. The project's agricultural component supported the gov-ernment's recovery strategy, which, at the core, includedmeasures to restore food security, promote the small privatesector in agriculture, and repair basic farm infrastructure. Asits title suggests, the Critical Imports Project provided basicinputs not produced domestically, such as fertilizer, high-quality seeds, plastic sheeting for greenhouses, and spareparts for agricultural machinery. Its objectives were to im-prove crop and animal production, repair irrigation and ruralinfrastructure, and encourage agricultural mechanization.

Prior to the March 1992 elections, food distribution, healthand education services, and industrial and agricultural pro-duction had totally collapsed. The severity of the collapse-aresult of manifestations of popular frustration over the gov-ernment and the economy-underlined the importance of for-mulating a coherent poverty alleviation strategy. During thewinter of 1991-92, disintegration in the cities was seen mainlyin increased crime and in long food distribution lines. In ruralareas, widespread destruction of government property wascoupled with fatal food riots andc hijacking of food distributiontrucks.

Albania is largely a rural country-, more than 50 percent ofthe population is employed in agriculture, and roughly two-

50

thirds of the population lives outside the major cities. The dif-ferences i living standards between less and more developedregions are minimal. Privatization of agricultural collectivesbegan in mid-1991, with distribution of approximately 1.4hectares of land to each former employee of the collectives.Although private and collective plots are still interspersed, thegovernment perceived that even a partial privatization wouldgive impetus to development of a private agricultural sector.

Feeding the population is a priority for any government,particularly in Albania following the devastating food short-ages of the 1991-92 winter, when the country had become reli-ant on international food aid and foreign assistance for fooddistribution. With the growing season approaching, there wasa window of opportunity for the country to begin weaningitself from international aid while revitalizing domestic agri-cultural production. The challenge was to provide sufficientinputs so that the new private farmers would begin growingfood. The Bank (through its Critical Imports Project) andother multilaterr-1 and bilateral donors provided these inputs.

While the Critical Imports Project was still being imple-mented, the World Bank provided two additional credits forfurther developing agriculture and alleviating poverty: theAgriculture Sector Adjustment Credit and the Rural PovertyAlleviation Pilot Project. The latter, which became effective inApril 1993, develops agriculture by promoting small-scale pri-vate farms, providing cash for operations, creating the condi-tions for a rural market economy, and repairing basic ruralinfastructure.

The Rural Poverty Alleviation Project, which finances publicworks and a small-scale credit program, was designed toaccommodate cultural nuances. After the decades of isolation,when villagers were even more completely cut off from themodern world than were other elements of the Albanian popu-lation, it was paramount to choose staff who could bridge thegap between the intelligentsia, with the organizational abilityto implement the project, and the recipients of the loans on thevillage level. The village credit committees are elected andtherefore enjoy the confidence of the villagers. Under the

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project, regional demographics were carefully examined toidentify the poorest areas, and an autonomous agency, theRural Development Fund (RDF), was established to implementthe project.

The RDP credit program organizes and finances small loansfor income-generating activity in rural areas. Many of theseloans have been used to purchase livestock; others have beenused for agricultural inputs, trading enterprises, and handi-craft production. The elected village credit committees areactive in determining borrower eligibility, loan duration, andcollateral. Village solidarity also helps ensure repayment.

Cultiuating Hope in Albania's Rural Areas"Our projects are grass-roots operations and demand-driven. We workdirectly with the village and commune councils in identifyng theproject areas and in actualy implementing the projects. Onte theprojects are selected by the councils, our engineers prepare the tech-nical and financial evaluations, discuss the results with the councils,and finally sign the contract. During construction, we assure the com-munity administration that most of the work will be done by localworkers, and in this way we provide employment for thenL

'One major problem is that neither the community adrministrationnor the people have had any experience in managing, supervising, orconducting a project for their own community. Everything wasplanned, financed, and carried out by the central goverrnment underthe old regime. Therefore, people have had difficulties in owning theproject, doing something for the community, and usually have hadlesser commitment to the project. As a result, some projects that weintended to finish in three months lasted as long as six months.'Ib address this problem, we decided to create some incentives, forexample, by promising the community another project if they com-plete their ongoing project on time. Another problem is, cf course, thescarcity of equipment that the commrunes or villages require. Infra-structure equipment is scarce in Albania in general, but it is evenmore difficult for the poor communes and villages in the north withno line of commniication or transportation to find and. deliver theequipment.'

Vladimir Malkaj, director,Infrastructure Departynent, Rural Develupment Fund

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Reimbursements, which began in November 1993, have been100 percent to date.

The project also finances the rehabilitation of basic ruralinfrastructure such as rural schools, water distribution, andvillage roads to alleviate poverty, inject cash, and createemployment in the poorer areas. By the end of 1993 the RDFhad started more than eighty projects, of which thirty hadbeen completed. Currently, the RDF employs ten engineers andworks in poor mountain areas of some twenty districts. Inaddition to World Bank financing, the project is cofinanced bythe European Union and the Italian government.

Despite the great successes under the Rural Poverty Allevi-ation Project, large numbers of Albanians still want to move tourban areas, where living conditions, although often poor, arestill better than in rural regions. As employment opportunitiesdevelop in urban areas over the next decade, still more Alba-nians are expected to migrate to the cities. The governmenthas lifted restrictions on residency that were enforced undercentral planning, and the people are expected to take advan-tage of the freedom to choose their place of residence. Specificinitiatives are therefore needed to alleviate urban poverty. In

'A Project of Hope"Maria Nowak, who is on temporary assignment at the World Bankfrom the Caisse Franqaise de D6veloppement, has worked on replica-tion of the well-known approach of Bangladesh's Grameen Bank inWest African countries. Her experience has been particularly impor-tant to the success of the Rural Poverty Alleviation Project, for whichshe is task manager. The main idea of the project is to alleviate pov-erty in a proactive way, injecting cash resources into the economy andhelping people break the imagination baffler created by forty years ofisolation and central plaing.

Says Ms. Novak, "Credit is a very powerful tool in this respect. Theword credit is from Latin 'to truse; it not only provides the small cap-ital people need to start new activities but also gives them confidencein their own initiatives. President Berisha called this project 'aproject of hope,' which is a very apt description."

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anticipation, the government is formulating long-term strate-gies for developing urban private sector activities.

The Urban Works and Microenterprises Development PilotProject, now in preparation, will address the changing needsin urban centers by extending credits, like those providedunder the Rural Poverty Alleviation Project, for developmentof small enterprisLs in the cities. Other components of theproject will include, among other things, establishing demon-stration projects for microenterprise development and fumdingstudies, training, and exchanges for municipal officials. Theone-year pilot project will organize central institutions forproject implementation and establish a credit system inselected municipalities. This project, targeting very smallenterplises, wil'l operate in tandem with the Labor MarketDevelopment Project, also formulated through cooperationbetween the Bank and the Albanian government.

The Labor Market and the Social Safety Net

Prior to the 1992 efforts at far-reaching economic reform,Albania had extensive entitlement programs, including gener-ous pensions available at early ages, liberal unemploymentbenefits, maternity leave, and social protection programs forthose incapable of working. Large transfers from the statebudget maintained the relative balance of living standardsthroughout the country. Like other strict Stalinist countries,Albania did not have open unemployment, and during thetransition unemployment soared from practically zero to 25percent almost overnight.

Serious deterioration of the former system of social protec-tion began with the labor unrest that brought down the gov-ernment of Fatos Nano in May 1991. In July a social assistancelaw was promulgated that meshed social assistance ancd socialinsurance (or unemployment benefits). The law providedunemployment benefits to various social groups regardless ofactual employment status. In addition, idle workers in state-owned enterprises received 80 percent of their former wages.

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Because these measures failed to target social transfers prop-erly, they were a burden on the state budget.

Although in Albania close family ties provide an infonnalsocial safety net, the Meksi government realized the need forrevamping unemployment and social assistance programs.Furthermore, as Albania has moved from entirely state-controlled employment toward a market economy, significantamounts of the labor force have been shed from state enter-prises, causing an increase in unemployment. With privatiza-tion of state assets and the beginning of internationalinvestment, demands on the Albanian labor market requirenew training measures for workers, retraining for workersfrom the former state-owned enterprises, and implementationof modern labor policies.

Working together, the World Bank and government officialshave formulated a system to rationalize cash benefit pay-ments. In addition, the government has initiated a system ofblock grants for cash benefit payments and has begun todevelop a social security institute, provide policy advice, andmodernize the social security system. Assistance for furtherdevelopment of social insurance and assistance schemes wasfurthered by approval of the labor market and social safety netprojects by the World Banks Board of Executive Directors onSeptember 14, 1993.

A work force cannot be trained or retrained overnight. Inmid-1992 the World Bank and the Albanian governmentbegan preparing strategies for modernizing labor practices.After more than a year, this work culmsinated in September1993 in the approval of the Labor Market Development Credit,which bolsters policy reform and assists with the developmentof a strategy for modernizing worker training practices andretrnining unemployed workers. Under the credit, an indepen-dent government agency known as the Training, Enterprise,and Employment Fund (TEEF) was established to channel pub-lic resources to projects proposed by enterprises and privateentrepreneurs. Through the TEEF, entrepreneurs recruitpotential workers and train them in the workplace. The work-

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ers salaries during the training cycle come from the TEEF,which is inmded under the World Bank project. In return, theentrepreneurs recruit a percentage of these workers followingthe training period, and at that point employers begin payingthe salaries of the newly trained workers.

As a market economy begins to develop, the TEEF is organiz-ing small business clubs throughout the country. In the past,there were not even chambers of commerce in Albania, so theformation of these clubs is giving the new business leaders an

Empowering Women in Albania

Beginng in the Communist years, Albanian women have had accessto all levels of education, and before the 1990-92 transition approxi-mately half of the work force was female. But women were concen-trated in lower-paying and less prestigious occupations, and theirdaily routine was monopolized by jobs and household chores. Tradi-tionally, Albanian men have played only minor roles in family dutiesand child nurturing. For Albanian women, the challenge in the 1990sis integration across occupations and within traditional culturalboundaries. The economic transformation will continue to be difficultfor women as employment opportunities and skills criteria shift fromthe requirements of state-mandated employment toward the privatesector.

Most Albanian migrant workers in Italy and Greece are men, and alarge percentage of them are from rural areas. Rural women haveremained in the villages to tend the private plots of land and raisefamilies. This return to traditional divisions of labor has exacerbatedthe difficulties of integrating women into the emerging market econ-omy and ensuring their access to government positions. The govern-ment has instituted policies that will assist women in public sectoremployment and provide appropriate regulations for those in the pri-vate sector.

Several government initiatives have had a particularly importantimpact on women in the workplace. In May 1991, as part of the agree-ment that ended the strike which brought down the Nano govern-ment, workdays for women were shortened. By July 1993 the officialworkweek for all workers was shortened to five days, an action thatgives women more time for their many duties. In addition, the gov-ernment is seeking to increase maternity leave in 1994. In the long-

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important forum for discussing issues of mutual concern. Apilot project for the formation of a "small business incubator,"where office infrastructure is available for use by groups ofentrepreneurs in the area, will be initiated.

Other components of the Labor Market Project will assistthe government in establishing offices throughout the countryto facilitate and modernize the payment and administration ofunemployment benefit schemes and to train office workers incalculating these benefits and implementing the payment

term, as modem conveniences and attitudes begin to permeate Alba-nian society traditional demands on women will likely diminish, pro-viding greater personal freedont

The World Bank is setting an example for other businesses, notesResident Representative Kutlay Ebiri, by its active recruitment ofwomen for high-level positions in the Tlinra office. Women employeesinclude economists, project officers, and the liaison officer.

'- - 4t

4-v,5

|_r. Lt r

Traditional occupations: village woman spinning wool

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plans. The project includes institutional development in boththe central government and local benefit offices.

Under the centralized planning of the past, people wereplaced in jobs by the government, while job training and provi-sion of social security were the employer's responsibilities.Full employment was maintained by the state throughout the1980s, and although output decreased, the Albanian laborforce continued to grow. Since 1990 open unemployment hasincreased rapidly, to approximately 30 percent of the nonagri-cultural work force. Unemployment will continue to be a prob-lem through the mid-1990s as state enterprises scale backoperations or close down as a result of enterprise reform andprivatization.

The new private sector will only gradually be able to providemore productive jobs to absorb the surplus labor. As the coun-try moves toward proper incentives and clear responsibilities,the government is focusing on implementing a system of socialinsurance under which contributions and benefits are ratio-nalized and are linked to each other more practically. Betterincentives and a modernized system of administration withindividual contribution records are expected to enhance boththe efficiency of social insurance and its fiscal viability.Although Albania does not wish to abandon past social insur-ance achievements such as sick pay, pensions, and maternityand disability benefits, the country is strivingto provide thesebenefits in a more responsible manner. The Social Safety NetProject not only seeks to modernize collection and payment ofsocial insurance but, on a larger scale, also assists the govern-ment in balancing resource constraints and workers' needs ina market economy. Finally, the project is helping the govern-ment to terminate superfluous benefits, such as widespreadexceptions for receiving early pensions. (Although the legalages for receiving pensions are 55 for women and 60 for men,the average pensioner today begins receiving benefits at age53 for women and 57 for men as a result of the large number ofearly retirements.)

Responding to the social and fiscal challenges to welfare andemployment, the government in April 1992 created a Ministry

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of Labor and Social Protection. Albania, uniquely in Centraland Eastern Europe, never had either a labor or a welfareministry. The new ministry is the main focus for social andemployment policies. Its ambitious agenda includes supervi-sion of the reform of social insurance, the introduction andmanagement of the new system of unemployment benefits,and the introduction of a wide range of active labor marketmeasures, all new to Albania. Both the Social Safety NetProject and the Labor Market Development Project containsubstantial components to assist the ministry in meetingthese high expectations.

A fitrther challenge to labor market reform concerns theformer victims of political oppression. The Communist regimepersewuted, imprisoned, or interned approximately ole-seventhof the population for political purposes. For the vast majorityof these people, political persecution was indirect, involvingdeprivation of educational and job opportunities. However,50,000 to 60,000 Albanians were imprisoned or interned, andtheir reintegration into society continues to pose a challenge tothe government .b respond to these needs, the Committee forthe Ex-Politically Persecuted was formed with the mandate ofcoordinating and administering special assistance programsfor this constituency.

Health Services

Since the 1950s. widespread access to primary health care inAlbania has led to long life expectancy, low infant mortalityrates, and low mortality rates in the 35-69 years age bracket,particularly in comparison with other countries similar inincome levels and other demographics. These health indica-tors, comparable to those of other East European countrieswith much higher income levels, will be difficult to maintainbecause of the deterioration of health facilities and equipment,the lack of medical supplies, and inadequate training forhealth professionals.

While the large number of health facilities has made possi-ble the provision of health services to almost all citizens, the

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Rehabilitating Primary Health Care

lb maintain health services in Albania, it will be important to mod-ernize and rehabilitate the country's health service centers. "Commu-nity participation in rehabilitating health centers will underpin theentire project, and this component makes the [Health Rehabilitation]Project unique for Albania," says health project task manager EllenGoldstein. "The project will be administered by district level manag-ers and planners, yet communities receiving new health centers mustagree to actively participate in the project as welL" Other localresponsibilities will aIso be included.

Under the credit, 100 primary health care centers will be rehabili-tated in six districts: three in the north around Shkoder and three inthe southern area around Vlore. A national team of Albanian train-ers, trained under a technical assistance component of the loan, willpass on their budgetary and specialized health services skills to localhealth administrators. Observes the task manager, "This will developa local health management base where one previously did not exist."

requirements of the economic revitalization program under-score the importance of reassessing the entire health struc-ture. Presently, the system is bloated with insufficientlytrained personnel and inadequate facilities. The importance ofmaintaining ample facilities throughout the country cannot beoverstated. However, fimdamental restructuring of the Esectorhas to be achieved within existing fiscal constraints.

The government is establishing a strategy that seeks to pro-mote realistic and achievable targets for health standards.Primary health care, the most cost-effective means of achiev-ing health targets, will serve as the foundation for health ser-

vices. Rehabilitation of equipment for the health facilities willbe undertaken according to whether they are appropriate andefficient. Goals to be supported by the World Bank HealthRehabilitation Project include strengthening the primary caresystem, restoring essential hospital functions, consolidating-the network of referral hospitals, and making the drug produc-tion and distribution systems more competitive.

Through the mid-1990s a new health management structurewill be instituted under which eight regional hospitals will

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serve as the manatgement centers for all health services in theregion. Health center services will be standardized, healthproviders will be retrained, and health education programswill be strengthened. In addition, plans to improve thenational specialty hospitals in Tirand will be implementedafter 1996. Special attention will be given to improving themedical school at Tiran§ University.

The government will also seek to encourage private healthservice, as appropriate, over the coming years. Initially, pri-vate health service will be encouraged in dentistry, althoughdental services will be provided under the new governmentmanagement schemes as well. Although cost recovery will beinstituted for nonessiential drlgs, subsidies for essential phar-maceuticals will remain in place over the short term. For thecoming years, domestic pharmaceutical production will be lrm-ited to those pharmaceuticals that can be produced economi-caly in Albania, such as intravenous fluids and basic medicalconsumables such as cotton wool.

The ultimate target of the Albanian government is to ensurethe equitable distribution of health services and the best possi-ble health care. Since the 1950s strides in health standardshave been a point of pride for Albania. The governmentintends to ensure that standards remain high and, at thesame time, economically viable.

Education

Since 1990, with the opening of borders and the developmentof private business and private agriculture, the entire socialfiber of Albania has changed. To supplement family incomes,large numbers of Albanian youths are worling abroad insteadof continuing their education, tending new private farms athome, or struggling to start private businesses. New libertiesare encouraging greater freedom in educating students, butteachers' salaries are low and school facilities are in need ofrepair, contributing to the further breakdown of education.

Past successes in education were a consequence of theimportance given to literacy and training under central plan-

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Investments in health and education are investments in people.

ning. Investments in maintaining educational facilities were,however, inadequate, and the widespread destruction ofschools during the 1990-92 revolution has exacerbated thedesperate need for school rehabilitation. Since 1990 enroll-ment has dropped significantly at all levels of education.

As in all sectors of the Albanian government, resources areinadequate for rehabilitating school facilites, paying teachersalaries, and providing textbooks, laboratories, and otherbasic educational tools. The World Bank and the Albanian gov-ernment have formulated a two-tier strategy that comprisescomponents for curriculum development and facility rehabili-tation in primary and secondary education, as well as for post-secondary (university and advanced training) facilities.

Because the potential funding is significantly below the lev-els required for quickly rehabilitating schools, the governmenthas begun the revitalization process by initially targeting themost dilapidated facilities. Through the World Bank SchoolRehabilitation Project, classrooms will be refitted with new

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window glass, heaters, furniture, and educational tools, on aprioritized basis. Initially, some basic inputs for school rehabil-itation, including paper, chalkboards, and window glass forclassrooms, were procured under the Critical Imports Project.

During the previous regime, the curziculum reflected therequirements and ideology of the Communist system.Although teaching has been depoliticized, the absence of newtextbooks and adequate teacher retraining has been a hin-drance to quick revitalization of education. New textbookshave been distributed for the 1S93-94 school year, and theMinistry of Education plans to continue teacher training andimprove recruitment procedures in the coming years.

Similar achiievements in rescuing higher education haveresulted from reorganization of postsecondary schools and uni-versities, introduction of new textbooks and teaching materi-als, and emergency repair and rehabilitation of facilities.Although institutions of higher education will remain underthe Ministry of Education in the short term, current plansenvision giving the university system autonomy from the stateas soon as that is financially feasible.

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SUPPORTING THE DEVELOPMENTOF A PRIVATE SECTOR

In command economaies, the use of inputs and the productionof outputs are dictated by central planning authorities. Thesuccessful transition to a market economy in these countriesdepends on rapid privatization of state-owned enterprises andassets, coupled with the development of a commercial bankingsystem to support the new private sector. Like other countriesin the region, Albania is grappling with the privatizationissue, but the extreme and autarkic nature of its old commandeconomy has made privatization perhaps even more difficultin Albania than in other former socialist countries. The pro-cess has been all the more exacting because of the chaos in thestate-owned enterprise (sOE) sector during the 1990-92 transi-tion. This anarchy, caused by the government's inability tocontinue subsidizing inefficient enterprises, led to a cotal col-lapse of the industrial sector and to an unemployment rate ofat least 30 percent of the urban labor force in 1990.

Albania has now designed strategies for rehabilitating theenterprise and financial sectors. Privatization efforts havemoved forward for small and medium-size enterprises, and thegovernment is seeking to develop practical methods for down-sizing large enterprises, curtailing subsidies to enterprises,

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and bringing interenterprise arrears under control. Within thefinancial sector, the government's strategy includes separatingstate banking actiNities from commercial banking, developinglending criteria, liberalizing interest rates, and supporting thedevelopment of private banking.

State Enterprise Sector

Archaic technology in Albanian enterprises was the norm dur-ing the Communist regime. Most industrial equipment waspurchased from the U.S.S.R., China, and East European coun-tries and was outmoded even for its day. After the 1978 breakwith China, little industrial equipment was purchased, as aresult of the total isolation of the country and the dearth of for-eign currency for buying modem equipment. Industries had tostumble along with equipment in desperate states of disrepair.But obsolete andc neglected equipment is not solely responsiblefor the dilapidated condition of most Albwaian enterprises.State planning agencies controlled enterprises' production,and managers had little discretion, except in the choice ofmethods for meeting centrally set targets under the five-yearplans.

In 1991 the Albanian government began privatizing stateassets. Initially, few restaurants, shops, taxis, or other serviceenterprises went to private citizens. lb administer the privati-zation scheme, two bureaus were established by legislation:the Preparatory Commission for the Process of Privatization(PCPP), an interministerial body responsible for preparation ofprivatization cases, and the National Agency for Privatization(NAP), under the control of the Council of Ministers. The NAPwas given regulatory and administrative fimetions, includingthe approval of privatization transactions. Both bodies estab-lished branch offices in each district of the country.

Many problems arose in designing and implementing theinitial privatization program. With the abolition of centralplanning, control over the enterprises disappeared. In addi-tion, there were widespread accusations that privatizationtransactions completed prior to the elections fuillled only cri-

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Rescuing an Industrial Sector in TroubleAs a result of a deliberate concentration on the industrial sector inthe post-World War II era, industrial enterprises represent the larg-est segment of Albania's nonagricultural economy. Starting from avery small base, Albania experienced rapid industrial growth untilabout 1980. Between 1950 and 1975, in response to high rates ofinvestment, total industrial output grew rapidly, although the qualityand real value of industrial products were never put to an interna-tional market test. Over the past decade, growth decelerated substan-tially as a result of the closing of the economy and, after 1978, thecessation of all external assistance. During 1980-89 industrial pro-duction grew at less than 3 percent per year, and it fell by 40 percentin 1991 and 1992. In most industrial subsectors, output is a fractionof pre-1990 levels. A large number of factories have closed altogetheror operate sporadically, and more than half of the public enterpriselabor force has been dismissed.

This sharp decline, of a magnitude not observed elsewhere informer socialist economies, is the result of a number of factors linkedto the total collapse of Albania's extreme brand of central planning.Until 1991 all prices were set centrally, with minimal changesbetween five-year plan periods. All productive assets were owned bythe state, and production was controlled through large state-ownedenterprises (SOEs). Each SOE reported to a sector ministry that exer-cised control over investments, production levels, direction of trade,and utilization of surpluses. The system also led to inappropriateinvestment and endemic overmning.

State enterprises are now legally autonomous entities, but in prac-tice they often turn to the line ministries for technical and financialsupport. Following several recent reorganizations, the principalresponsibility for the industrial sector is now vested unambiguously

teria of political expediency and that most of the privatizedunits were given to Communist sympathizers and apparat-chiks. On April 24, 1992, the new government temporarilysuspended the privatization process pending formulation of along-term policy. New and revised legislation passed the par-liament, and after a year of very slow progress, privatizationgained full momentum in mid-1993 with the appointment ofstrong national and local leadership. By the end of 1993 morethan 20,000 enterprises or groups with up to ten employees

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in the Ministry of Industry and Trade. Construction enterprisesare under the Ministry of Construction, and agroindustrial SOEs areunder the Ministry of Agriculture. Other ministries, such as Trans-port and Mining and Energy Sources, also have enterprises undertheir authority.

The number of SOEs has been increasing over the past two years aslarge, multipurpose industries, particularly in agroprocessing andlight industry; have been split up to improve manageability and pre-pare for privatization. Of the 2,000 or so SOEs now in existence, alarge share are not currently operating. Moreover, the financial posi-tion of SOEs has deteriorated rapidly, leading to growing interenter-prise arrears and bad bank loans. The decline of the state sector,however, is partly compensated by the rapid growth of small (argelyinformal) private companies in retail trade, handicrfts, construction,and services.

~* 1

Metallurgical combine near Elbassan

had been privatized. Larger enterprises generally remainedstate owned because administrative capacity, information sys-tems, regulation, and investment capital to run them privatelywere lacking.

The Albanian government has been working with the WorldBank in formulating a privatization strategy that uses a multi-track approach. Very rapid privatization, particularly in thesmall-scale sector, is being encouraged to quickly achieve atleast some growth in production. Small and medium-size

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enterprises are being privatized with no budgetary financing.Meanwhile, the government is dealing with a limited numberof large or particularly difficult enterprises with the help of anEnterprise Restructuring Agency (ERA) and is providing somefinancing through the state budget in the short run to solvethe urgent problems of these enterprises. These large compa-nies are being analyzed case by case and either closed or priva-tized, depending on their specific conditions.

Privatization of Small and Medium-Size Enterprises

The government has privatized small units and manymedium-size enterprises. A 1991 law on privatization permit-ted the rapid privatization of small enterprises with a man-mum of about ten employees, primarily in the fields of retailtrade, services, and handicrafts. Most of these were solddirectly to employers at advantageous prices. In addition, inMay 1993 the Council of Ministers issued Decision 248, whichestablished procedures for the privatization of medium-sizefirms with fewer than 300 employees and with a maximumbook value of $500,000. By the end of 1993, according to statis-tics provided by the NAP, of 1,200 small and medium-sizeenterprises, more than 700 had been privatized under thismeasure. These privatized enterprises are highly visible inTirane and other major cities. A large majority were solddirectly to employees at book value, often at a fraction of mar-ket value. In recent months, book value has risen with infla-tion, and the NAP has increasingly relied on auctions,particularly for the more attractive units. Vigorous privatiza-tion efforts are expected to continue during 1994.

The privatization of small and medium-size enterprises hasproceeded rapidly and successfully, but, as elsewhere in East-ern Europe, the process is inevitably controversial. Privatiza-tions in 1991 and early 1992 lacked transparency and fairnessas a result of the confiscatory practices and preferential posi-tions of the former nomenklatura. Some beneficiaries of priva-tization have earned large profits by Albanian standards,calsing considerable resentment. Although under Decision

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248 auctions were to be the main method of privatization, theyhave, been. used less than 10 percent of the time so far. Mostenterprises were sold to a single interested party becausethere was only one bidder, or were sold to employees directly."We had to break the deadlock that had stopped privatizationin 1992," says Bashkim Kopliku, deputy prime minister foreconomic reforms. "Decision 248 took account of Albanian real-ities and allowed us to move ahead very quickly.'

Selling SOEs to a single bidder is not necessarily the way toensure the highest selling price. However, revenue raising isnot the most important consideration. The method used inAlbania has achieved the fastest possible privatization, allow-ing the government to divest itself of enterprises and unitsrequiring budgetary support and thereby freeing fRnds for usein public investments and social services. In an effort to accel-erate the next round of privatization, the government is pre-paring a new legal framework to encourage greaterpartcipation and maximum public support for the process.

Priuctization of Nonagricultural Land

In an effort to compensate for the inefficient practices of thepast and to avoid erosion of public support for privatization, inApril 1993 the parliament passed a law on restitution givingformer owners of nonagricultural land the right to purchasethe buildings sitting on their former property. (Compensationfor former owners of agricultural land is discussed in the chap-ter on agriculture.) If the buildings sitting on this land havealready been privatized, the law creates co-ownership betweenthe landowner and the new building owner. The buildingowner leases the land for two years from the former owner at arate set by law, after which time the owners must make theirown commercial arrangement.

Several outstanding problems concern the restitution ofproperties privatized before enactment of this legislation.Since no provisions for exclusion of these properties exist,uncertainties over ownership of previously privatized proper-ties are causing confusion and, in some instances, reversal of

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early privatizations. According to the law, former owners aregiven six months to register their claims, after which they willonly be entitled to financial compensation. However, whenthere are justifiable reasons, the law provides for an extensionbeyond six months. That the term justifiable is not defined inthe law fiuther complicates privatization.

It is estimated that about 60 to 70 percent of all privatizableassets will be privatized through restitution. Following thesettlement of restitution claims, privatization should move for-ward rapidly.

Restructuring Large Enterprises

Most of Albania's industrial sector will not be viable withoutrestructuring and significant downsizing. For large enter-prises (those with more than 300 employees 'or book value ofmore than $500,000), immediate privatization is unlikelybecause running them on a commercial basis would implymass layoffs. Ihe state will have to consider case by case par-ticularly problematic enterprises, which include large indus-trial and mining complexes with excessive labor forces andindustries that maay be able to provide critical, low-cost inputsto private and public enterprises.

A comprehensive framework for privatizing large enter-prises has yet to be developed. In mid-1993 the governmentaddressed the issue by establishing, with assistance from theWorld Bank, the ERA, which is intended to be a short-livedorganization that reports directly to the Council of Ministers.The ERA has identified thirty-two enterprises as the key prob-lem cases requiring managerial and financial assistance priorto privatization. The ERA, which is financed through the bud-get as a discrete expenditure, will be closed down after it hasaccomplished its task. The goal is to restructure these selectedenterprises witlh the aim of achieving more efficient operationwithin a reasonable period of time. Eventually, those enter-pr-ises with good potential to become competitive will be priva-tized with the help of foreign investors. Those that have nofuture will be liquidated, and the layoffs will be dealt with in

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an orderly way. Public enterprises operating in the utilities,public works, and transport sectors are likely to stay in thepublic domain for the near future. The remaining large enter-prises, together with the medium-size enterprises mentionedearlier, will be privatized without further budgetary outlays.

The ERA began its operations at the end of 1993 and byMarch 1994 had built a competent team of Albanian expertssupported by external advisers. The government has selectedtextile, chemical, electromechanical, and consumer goodsenterprises, as well as coal, iron, and nickel mines, for restruc-turing under the ERA. These enterprises will be either closedor considerably downsized during the restructuring process. Inan effort to avoid creating incentives against privatization-for instance, by giving the greatest amount of public supportto the worst problem enterprises-any access to ERA resourceswill be accompanied by layoffs or reductions in wages.Restructuring plans for some ERA enterprises are being pre-pared, and implementation is to start in mid-1994.

Genc Qelo, deputy chairman of the ERA, thinks that themain problem with privatization is a social one:

These large enterprises employed hundreds of workers. Forinstance, the coal mine in Valias near Tiran§ is not likely tosurvive, since it produces low-calorie coal, and there arethree other coal mines in Albania that produce good-qualitycoal. The situation is certainly a tough one, since the factoryemploys 1,200 workers. Also, it is politically and historicallydifficult to simply close down this factory, since its workersplayed an important role during the spring 1991 laborunrest that resulted in the fall of the Communist gover-ment. However, we think that the other job opportunities inthe area, such as the reconstruction of the airport and theDurres-Tirane highway, will help ease the unemploymentproblem in Valias.

If privatization of large enterprises is to suceeed, adminis-trative resources need to be used more effectively. In mid-1993the government put in place a high-level governing board forthe NAP to provide interministerial policy coordination. The

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NAP's board members are appointed by the prime minister, andthe board is chaired by the deputy prime minister responsiblefor economic reforms. Pending parliamentary approval, thePCPP is to be merged into the NAP, which will furtherstrengthen the privatization authority and make the best useof the available administrative resources.

Enterprise ownership fights must also be clearly defined.Currently, there is no consistent ownership control over theSOEs and no systematic reporting by these enterprises. In July1992 a state enterprise law that restricts the control of minis-tries over the SOEs was passed. However, in practice, manystate enterprises still do not exercise their legal autonomy. Forinstance, out of habit they request ministerial agreement evenfor relatively minor decisions or ask for financial support sothat they can continue to operate. Moreover, the law containsno reference to the possible use of outside directors, no clearprocedures for the transformation of SOEs into private enter-prises, and no definition of the rights of the state as owner.The government has taken important steps to improve themanagement of some SOEs-for instance, by replacing andimproving many top enterprise managers-but these effortshave lacked clear criteria and transparency. SOE managers'accountability for ownership and control of their enterpriseswithout reliance on government financial support is now beingestablished by the government in cooperation with the WorldBank.

Interenterprise Arrears

Under the previous regime, the government financed enter-pnses through the banling sector, irrespective of their credit-worthiness. Since the banks did not need to consider whetherthe loans would be repaid, a large part of these loans went intoarrears. In 1992 the government, increasingly aware of therisks of lending to nonviable enterprises, took steps to enforcefinancial discipline and to reduce significantly the number ofnew credits.

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During 1992 many state enterprises resorted to finanrcingtheir activities largely through interenterprise credits becauseof the restrictions on budgetary subsidies and credits from thebanking system, together with the deep decline in productionand the rise in wage costs. Interenterprise arrears accumu-lated as invoices that could not be paid for lack of funds, andthe banks decided which invoice to pay when fimds becameavailable in the account of an SOE. By the end of October 1992the arrears had grown from virtually zero to more than 13 bil-lion leks. This trend caused paralysis in the payments system.In early 1993 the government took steps to clear arrears anddiscourage their further growth, primarily by instructing thebanks to change their payment mechanism and to stiffen theirlending criteria. As a result of these measures, arrears grew ata slower pace, to 16 billion leks at the end of 1993. A numberof state enterprises now seem to be requiring cash paymentsfor sales to other enterprises. However, there is some evidencethat interenterprise arrears have started to accumulate out-side the banking system.

Challenges for the Enterprise Sector

Inevitably, public loss makers will receive public funding,either through the budget or through the banking sector, for aslong as they operate. The government therefore needs to con-centrate on privatizing as many enterprises as possible and tomake absolutely clear which of the remaining state enter-prises will be funded by the budget. Furthermore, the govem-ment should ensure that public financing of state enterpriseswill be subject to an exphcit budget constraint and that publicresources will be distributed only to the enterprises that are ofthe greatest economic, social, and strategic importance. Mostother enterprises will be responsible for their own perfor-mance and financing, and no pressure on their behalf will beapplied to the banks. As a result, the state-owned banks willbe likely to operate on a more cornmercial basis than before,

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with clearer lending criteria and under constraints that willprovide incentives to focus on more creditworthy enterprises,public and private.

Developing a Financial System

Like the enterprise sector, Albania's financial sector mustundergo fundamental changes. A significant effort is requiredto develop financial sector infrastructure, institutions, andprilicies and programs and, most importantly, to train individ-uals. Existing institutions need to be modernized, and theoperating environment needs to be made conducive to theemergence of new banks.

Under the former centrally planned regime, the Bank ofAlbania undertook all central and commercial banking activi-ties and operated as a financial institution. In -this system,bankers were mere bookkeepers, transferring budget funds tostate enterprises. The whole economy was state financed; so-called loans were, in the end, drawn from and repayable to thestate budget, and there was no need to assess a borrower'screditworthiness or actual ability to repay a loan. The com-mercial banlking departments in the central bank served onlyto ensure that credit reached those deemed worthy by the poli-ticians and planners. Consequently, present-day banks areextremely weak in core banldng functions such as credit riskanalysis, loan collection, and provision of services.

In spite of restructuring efforts over the past three years,development of a viable commercial banking system has beenrelatively slow. Many of the factors hindering this process areproblems inherited from the years under a centrally plannedbanking system. In the past banks made large loans to trou-bled SOEs) and with the collapse of SOE output, a large part ofthese loans went into arrears and virtually all the assets of thebanking system were wiped out.

In early 1991 the banking system was restructured from amonobank to a two-tier system. Currently, the Bank of Alba-nia is an independent bank that handles central banking func-tions such as supervision and monetary control. The Savings

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Bank is dedicated to mobilizing household deposits, and theNational Commercial Bank lends to and mobilizes deEi "sfrom industrial and commercial enterprises. The Bank forAgriculture and Development, which supported agriculturalstate enterprises, is now in liquidation. In October 1993 theRural Commercial Bank was legally established as its succes-sor; the new bank, which is suppu& Wed by the World Bank'sAgriculture Sector Adjustment Credit, operates on commercialprinciples and provides credit to private farmers and otherrural entrepreneurs.

In dealing with the state-owned banking sector, the firststep taken by the government was to remove bad loans to SOEsfrom the books of the banks. Then, in July 1992 banks wereinstructed to lend only on strictly commercial criteria and attheir own risk. In late 1992 the government agreed to forgiveoutstanding SOE debt incurred prior to July 1992. When inter-enterprise arrears accelerated-in large part due to enter-prises' difficulty in obtaining bank credit-the governmentagain acted decisively to stop the practice of using paymentorders insufficiently backed by funds as a way for enterprisesto obtain credit. However, in late 1993 a government decisionto extend public guarantees on bank loans to state enterprisesencouraged banks to continue lending to nonviable enter-prises. At present, therefore, the banking sector is still bur-dened with a large stock of nonperforming assets, mostly badloans to state enterprises. The government plans to issue tothe banking sector bonds for about 10 percent of aggregatedcommercial bank assets. These bonds will replace the enter-prise obligations and thus will compensate and recapitalizethe banks, under the condition that Lanks use market-orientedcriteria for lending. Also, no more government guarantees willbe extended except in connection with onlending of foreigncredits. In the case of the Bank for Agriculture and Develop-ment, for instance, financial restructuring started with theidentification ot'. bad loans made to now-dissolved state farmsand liquidatedi agricultural cooperatives. The bad loans andthe corresponding liabilities are being taken off the banlksbooks and covered through government bonds. The remaining

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Reform in the Enterprise and Banking Sectors"The reforms to be supported under this project are crucial to thegrowth of the Albanian economy. Now that the government has suc-cessfully stabilized the economy, structural reforms must be rapidlyput in place to provide the framework for growth. The major principleof the strategy pursued in this area is that reforms in financial andenterprise sectors have to proceed concurrently. Therefore the [Enter-prise and Financial Sector Adjustment Credit, or EFSACJ is a multi-objective operation dealing with interdependent enterprise andfinancial sector problems."

Stanislas Balcerac, task rnanager, EFSAC

With privatization and restructuring already in process, the EFSACwill provide quick-disbursing fumds for balance of payments assis-tance in support of the government's reform program in the enter-prise and financial sectors. In the enterprise sector the EFSAC willsupport implementation of privatization strategy and the restructur-ing of large problem enterprises under the ERA. In the financial sec-tor, the World Bank, together with tbr MF, has so far given priority tobuilding up the central bank as a upervisory body in the banlkingsector and the chief debt-negotiating entity. The EFSAC will now sup-port the overall development of banking infrastructure, such as theaccounting framework, supervision and regulation, a modern pay-ments system, and the institutional strengthcning of the banks,through support for bank staff training and improvement of the legalframework.

Through the Technical Assistance Project for Economic Reforms,the Bank is also providing institutional support to the agenciesinvolved in the proposed EFSAC to help ensure that appropriatearrangements are in place to implement the enterprise and financialsector adjustment program. Startup activities for the EFSAC projectare underway.

good assets have been transferred to the new Rural Commer-cial Bank, which is now offering new loans to private farmers.

Despite structural weaknesses concerning commercial bankassets at the Bank for Agriculture and Development and theNational Commercial Bank, deposit mobilization has increased

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for the commercial banks, reflecting continuing confidencethat deposits held wilh banks are safe. This is parti4: ularlytrue in the case of the Savings Bank deposits, for which thestate provides an implicit guarantee of liquidity

Interest rates, which were highly negative in real terms in1992, heve also been reformed. Under the existing system, tLeBank of Albania sets the floor on deposit rates and providesguidance on lending rates. As a result of sharply lowered infla-don rates, Ln July 1993 interest rates were lowered. In thefuture, interest rates applied by private banks will be whollydetermined by market forces.

All'state-owned banks in Albania today face the need forradical changes to upgrade the basic banking skills of theirstaffs: banks are now at risk when they lend money, and this isa new and previously unknown responsibility for them. Alba-nia is virtually the only country in the world with practicallyno domestic private banks, and with most private lending inthe informal sector. The absence of an appropriate regulatoryframework has been a key obstacle, to the development of pri-vate banking. Clear and fair criteria to encourage privateentrants are being developed and are expected to be imple-mented in 1994. The interbank market is currently adminis-tered largely by the Bank of Albania; a market of bonds andovernight securities does not yet exist. The World Bank EFSAC

will support government efforts to establish the proper super-visory, regulatory, and infrastructural support for an inter-bank market in which banks will borrow and lend at marketrates.

The Albanian financial system still lags behind internationalstandards. However, in comparison with the situation of only ayear ago, the achievemeilts so far are promising, particularlythe establishment of the Rural Commercial Bank, reform ofinterest rates, and increasing deposit mobilization. The realchallenge is to establish a system of small and medium-sizeprivate banks that can mobilize deposits and lend to newly

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privatized enterprises. This can be done only when the appro-priate banking infrastructure-regulations and supervision,information systems, an accounting framework, an opera-tional payments system, and training-is in place. In themeantime, the government will strengthen the state-ownedcommercial banks through extensive training of the staff,intensify competition through the provision of incentives forthe entry of new private financial intermediaries, and build upthe infrastructure required for a modem banking system.

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LOOKING FORWARD

The first two years of economic reforms have producedremarkable results for Albania. With its early successes, par-ticularly in stabilizing the economy, achieving low inflationrates, privatizing housing, and emboldening private agricul-ture, Albania can look toward the twenty-first century withaspirations for prosperity and integration into Europe. Thesesuccesses are providing a base for general economic recovery.

Contributing to the social consensus that makes possiblecontinued reform is the concrete evidence that Albania's lead-ers are fulfilling their promise to integrate their country intoEurope. For the public, visible changes in the country are asign that the isolation and disintegration of the past are over.Imported consumer goods, previously a rarity, are now accessi-ble to those who can afford them, and new shops carryingthese goods have been established in the major cities. Not onlydo these goods serve as incentives for the new entrepreneurs,but they also are indicative of the opening of Albania. The tan-gible signs are most important for the innumerable Albanianswho were persecuted under the previous regime and for theordinary citizens whose only sight of the outside world wasthrough the Italian and Yugoslav television services (althoughthese, too, were officially prohibited).

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The new shopkeepers and other entrepreneurs who form asmall but growing middle class will serve as a foundation foreconomic development. The prospects are bright for the devel-opment of Albania's abundant natural resources, including itsgreat potential for tourism, favorable location near the heartof European markets, and young, literate, and progressivepopulation. Encouraging foreign investment is a priority forfurther integration; the development of institutional skills,incentives, and an appropriate legal framework for foreignventures will require a sustained effort by authorities.

The recovery thus far has been substantial, but many chal-lenges remain for the fuature. Among these concerns are com-pletion of the privatization process, renegotiation of foreigndebt, improvement of tax administration, and maintenance ofthe stabilization program. In addressing the challenges to eco-

The castle ofAli of Tepelen&. Wiith its historic sites and magnifi-cent scenery, Albania is a fascinating destination for tourists.

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nomic development, the Albanian government and the WorldBank have agreed on a lending program targeting the mostimportant sectors of the economy and general economic stabi-lization; of course, much depends on progress in the individualsectors. Some reforms will be more successful than others,wbich can lead to changes in the composition of the lendingprogram. Meanwhile, the Bank is trying to help accommodatethe most pressing needs in the economy, particularly in insti-tutional development and infrastructure.

Successes

In all aspects of economic and political life, Albania hasstarted to build from scratch the institutions required for anopen, pluralistic, market-oriented society. 'With great forti-tude, it has implemented an ambitious economic stabilizationprogram that is yielding positive results.

Within the first year of economic reform, Albania met allconditions for standby arrangements with the MF-a feat notmatched by many other transitional countries in Central andEastern Europe. In 1993 Albania achieved 11 percent growthof GDP. following three consecutive years of drastic decline.This rate of growth was the fastest of any European economy.The budget was brought under control, while agricultural out-put and private sector activity increased. Foreign exchangereserves have risen, and the lek has appreciated by about 30percent since the institution of the freely floating exchangemarket. No one could have predicted that the poorest of all thepost-Communist countries of Europe, the one with the mostexcessive Stalinist past and the most isolated from the outsideworld, would be able to generate such a dramatic turnaroundso quickly.

These successes are attributable to early and decisive eco-nomic actions by the government. Starting in April 1992, dras-tic economic stabilization measures were taken the budgetdeficit was reduced, strict monetary targets were enforced,automatic extension of bank credit to state enterprises wascurtailed, legislation formalizing a two-tier banking system

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was adopted, trade was liberalized, and privatization in agri-culture and housing was organized and completed. Most artifi-cially controlled prices, with the exception of those for basicconsumer goods, were freed. Although initially pricesincreased dramatically, they then stabilized. Albania stoppedthe high inflation that threatens so many countries in theregion. Simultaneously, the currency was floated, privateexchange transactions were legalized, ancd all current accounttransactions.were liberalized.

Agricultural reform has been the centerpiece for economicreform, and successes in the agricultural sector have beenamong the greatest in Albania thus far. In 1992 agriculturalproduction increased by 18 percent as a result of privatizationand restoration of basic agricultural infrastructure. Growth inthe sector is expected to continue at high levels in comingyears. On July 1, 1993, the government raised the price ofwheat to near world market levels and increased bread pricesto cover costs. In less than one month these actions began toencourage greater private sector activity in agriculture.

Three years ago the Albanian government began privatiza-tion of small and medium-size enterprises. Officials anticipatethat through a combination of privatization and restitution ofproperty to previous owners, most state assets will have beentransferred to the private sector by the end of 1995. Housingprivatization began in May 1993 and was 97 percent completeby December of that year. As a result of the emphasis on priva-tization and the absence of government restrictions on privatebusiness activities, a new private sector is blossoming. Thespeed of privatization in Albania is indicative of the govern-ment's desire to limit its involvement in production and turntoward a regulatory role.

Early macroeconomic successes are in part attributable tothe important international donations that followed the thaw-ing of tensions with Western nations after the fall of commu-nism. Foreign assistance-particularly from multilateralorganizations, including the European Union, the EuropeanBank for Reconstruction and Development (EBRD), the UnitedNations, the World Bank, and the IMF, as well as through bilat-

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Roadside prnvate enterprise

eral contributions-has allowed iacreasing investments inhuman and physical capital and has reinforced successful sta-bilization. Stabilization has been encouraged by the influx offoreign currency sent to family members by Albanian workersabroad, primarily in Greece and Italy.

Vigilance on the part of the government is required forbuilding these initial successes into long-term achievements.

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Many challenges will have to be overcome to consolidate thetransition. Popular support for a market economy and the gov-ernment's courage in adopting the measures needed for arapid transition will be the two essential elements for success.

Challenges

1h meet the next stage of challenges, the Albanian economymust be steered onto a sustainable growth path, and majorinvestments in economic and social infiastructure must becarried out. This wil require steady dedication on the part ofAlbanian authorities and continued external support. Theexceptionally good performance of the economy in 1993 pro-vides a great opportunity for Albania. Attitudes have changed,and there is now a sense of optimism that was totally absentin 1991 or early 1992. Albania can now harness this newenergy to launch the next phase of reforms: instituting aneffective system of taxation, further strengthening the budget,downsizing the old industrial sector, attracting new indus-tries, developing the financial sector, utilizing Albania's natu-ral resources, protecting the environment, maintaining socialservices, and improving public administration.

In order to consolidate economic stabilization, budgetaryrevenues and expenditures must be modified to reflect the newstructure of the economy and the new role of the state. Tbfinance public in.vestments in infrastructure, social services,ancd the civil service, the government must have the ability toraise revenues through new and more efficient tax administra-tion. The government's main tax base under communism-thestate enterprise sector-is shrinkdng quickdy with privatiza-tion. Although the new pnvate sector is growing rapidly, itmostly consists of small unregistered businesses that do notyet contribute to tax revenues. The integration of new busi-nesses into the tax system will pose a great administrativechallenge for the government. With weak capacities to admin-ister taxes and an increase in revenue needs, authorities mustbe vigilant in collecting revenues.

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Albania's Stabilization Program"I had the impression that the Albanians were biting the bullet upfront on their economic policy. From the beginning, the authoritieswere willing to take difficult decisions on liberalizing prices, particu-larly the price of staple foods like bread, as well as liberalizing tradeand cutting subsidies to state enterprises. The measures were riskybut have paid off because one year later we began to see a strong sup-ply response, particularly in the agriculture sector.

"The greatest success for the Albanians so far is to have managedstabilization with so little implementation capacity. Paradoxically,with the crisis period now over, Albania has entered the most danger-ous period because the sense of urgency is now gone, yet many impor-tant steps must still be taken, especially within enterprise andfinancial restructuring, tax reform, public investment programs, andsocial assistance transfers. The payoffs from these refrrms are likelyto materialize in the medium term only, while some t f the costs willhave to be borne up front. Yet there is no other way to maintain thehard-won benefits of the recent stabilization?

Dominique Dwor-Frecaut, country economistforAlbania, World Bank

|.r2>5;.. PARISi KLURC UKDPI

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International support for Albania's priuatization efforts: theFirst Donors' Meeting on Albania, hrane, July 1992

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Shrinldng the size of the public sector and redefining themost urgent needs in public investment and civil servicereform have been priorities for the transition. The concept ofprivate property and privately owned businesses is new toAlbania. In the past, extreme centralization permeated allaspects of society; now the development of a viable private sec-tor is a prerequisite for successful transition. Another task ofthe government is to rationalize social insurance and cashbenefit programs by targeting these entitlements to the mostneedy citizens. Similarly, budget transfers to state banks andenterprises should take place only within strictly defined bud-getary limits. And while, from a budgethry perspective, sub-stantial cuts in the total civil service wage bill are necessary, itis equally necessary for the government to provide good sala-ries to those civil servants who work hard and effectively.

A successful tax system is required in order to raise reve-nues to support the budget. A legal framework for the tax sys-tem is being promulgated bv the parliament, but withoutrapid achievements in collecting taxes, the government riskslosing its ability to finance public investments and maintainsocial services. Foreign assistance can alleviate these prob-lems for only a short period of time while the governmentestablishes effective methods of tax collection.

Although privatization has accelerated the downsizing ofthe state enterprise sector, the government acknowledges thatprivatization alone will not solve the problems of all stateenterprises. Consequently, a number of the biggest loss mak-ers among state enterprises must be closed down. The ardulousprocess of restructuring particuarly problematic enterpnrsesis beginning, with only some of these units being good privati-zation prospects.

Establishing an effective new banking system will supportthe development of the private sector and create a foundationfor structural reform of the economy. At the beginning, Alba-nian authorities concentrated on breaking apart the StateBank, which undertook all central and commercial bankingfunctions. In the first year, the Savings Bank, the Bank forAgriculture and Development, and the National Commercial

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Bank have emerged as state-owned commercial banks, andsome banks have been established as joint ventures with for-eign capital. In October 1993 the new Rural Commercial Bankreceived its license under the general Banking Law as the suc-cessor to the Bank for Agriculture and Development; operat-ing on commercial principles, it provides financial services toagricultural and other rural customers. Although greatprogress has been achieved in the financial sector, many chal-lenges remain, including the privatization of commercialbanks, development of modem banking expertise and infra-structure, and introduction of regulatory authority over thefinancial sector.

Because the change of economic regime has been very rapidand there has been no prior experience with decentralized eco-nomic decisionmaking, the needs for reform are enormous,covering all sectors of the economy. Albania has abandonedcentral planning but does not yet have the institutions, exper-tise, or infrastructure required to be a well-finctioning marketeconomy. Furthermore, the implementation of reform is con-strained by the limited administrative capacity within thegovernment and by the low level of income per capita, whichmakes the population particularly vulnerable to the costs ofadjustment. Substantial external resources will be required inthe immediate future to alleviate the burden of adjustment onthe most vulnerable segments of society.

The speed with which Albania consolidates economic suc-cess is predicated on continued donor support and foreigninvestment, two factors that Albania and the World Bank aretrying to address. Efforts to coordinate intemational assis-tance should be aided by Albania's public investment program,which establishes priorities for donor support for investmentprojects. The government also welcomes foreign pnrvateinvestment and is establishing the necessarj legal and institu-tional frameworks to facilitate it.

Looking toward the future, the greatest challenges are tobuild the infrastructure needed to accommodate a modernmarket economy, sustain economic stabilization, and provide alegal and social environment that can foster private economic

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activity. In meeting these challenges, the dedication and perse-verance of the authorities as they work to rebuild the countryare central to future prosperity.

Together, Albania and the World Bank have embarked on anexciting journey. The early successes achieved in the 1992-94period are a good start. Much effort and tenacity will beneeded to build on these foundations and establish the rapid,self-sustaining growth that alone can bring prosperity to theAlbanian people.

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ALBANIA: BASIC COUNTRY DATA

Area: 28,748 sq. km

Agricultural land (1992): 11,585 sq. km

GNP per capita (1993): $422

Population (1992); 3.4 million

Urban population as a percentage of total (1992): 36

Projected population in 2000:3.9 million

Population density (1992): 118 per sq. km

Population density of agricultural land (1990): 463 per sq. km

Population growth rate (1991): 2 percent

Urban population growth rate (1987-92): 2.7 percent

Life expectancy at birth (1992): 73 years

Crude death rate (1990): 5.6 per thousand

Infant mortality (1992): 32 per 1,000 live births

Population per physician (1990): 731

Hospital beds per 1,000 inhabitants (1990): 5.8

Secondary school enrollment (1992): 45 percent of relevant agecohort

Illiteracy rate of popuIation over age 10 (1989): 7.9

Newspaper circulation (1990): 42 per 1,000 population

Labor force (1992): 17 million

Female share of labor force: 52 percent

Sources: Albania, Directorate of Statistics; World Bank and IMP staffestimates.

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