Authors: Armela Toska, Clara Bates and Grace Mayer
All over Albania you can find foreign companies that have decided to open their doors despite constant reasons to go elsewhere.
Major American companies such as KFC, ExxonMobil and others are developing their business in Albania, but experts agree that the gap between investment potential in Albania and actual foreign direct investment (FDI) remains wide.
Only a major effort by the Albanian government to attract foreign companies, they say, can change this and help benefit an economy that still remains among the poorest in Europe.
"We have expectations that the Albanian government would at least draw up a strategy to bring in more FDI as a way to balance the problems that exist on the ground," said Albana Shehaj, a Harvard University visiting scholar with the Minda de Gunzburg Center for Studies. European, and from Albania.
Shehaj has created a chart with foreign direct investment in the Western Balkans regions and has noted that foreign direct investment in Albania has been in a continuous decline since 2013. FDI in 2013 was 1.3 billion dollars, but by 2019, that number had dropped to $1.2 billion. Although there have been occasional increases in FDI over the past decade, the growth has only contributed to a small percentage of the country's overall GDP, leading to little impact on the country's economy.
Serbia, by comparison, has seen its net FDI as a percentage of GDP rise steadily since 2012. Major Italian companies such as Ferrero Rosher, Geox and Benetton chose to invest in Serbia over Albania , according to an article by monitor.al published in 2018.
North Macedonia also beat Albania for several foreign direct investments in 2018, including companies Johnson and Johnson, Lear Corporation, Johnson DOEL and CapCon.
Shehaj said that several factors – the unemployment rate reaching 12.8% in 2020, the migration of young Albanians to other countries in search of work and the recent decline in economic growth – have made foreign direct investment especially crucial for the economy of Albania. But the government's response, critics say, has been lukewarm.
"The steps that [the government] has taken to advance the measures and policies taken to address FDI were either limited in comparison to some other countries, or were being done 'just for the eye, so to speak,"' Shehaj said.
For "Sa per sy e faqe" Shehaj refers to a law that Albania passed in 2016 in an effort to attract more domestic and foreign investments. Despite the law's guidelines outlining strategic steps the government can take to evaluate and identify successful investments, the law has failed to attract a greater number of foreign investments since its enactment.
"The legal framework that facilitates trade and investment for foreign companies does not help," said Enio Jaco, President of the American Chamber of Commerce. "It is enough to see Albania's ranking in the regional competition. Albania ranks last. North Macedonia and Serbia lead. Which means that the legal framework offered by Albania is less attractive for foreign investments and is losing in the regional competition".
Jorida Tabaku, deputy of the opposition party and economic expert, blames the lack of FDI on several other factors, including competition for investments from neighboring countries.
"The fundamental problem that our country faces in attracting foreign direct investments (FDI) is related to the competitiveness that Albania has in relation to other countries in the region, in absorbing these investments and serious investors. Along with the lack of competition, the other main problems are fiscal policy and corruption", said Tabaku.
In other words, said Tabaku, the fiscal policies of neighboring countries are simpler and more appropriate than those of Albania, and the various subsidies offered by other countries are more attractive.
Why is this happening?
In 2018, Ricardo Hausmann, director of the Center for International Development at Harvard, called it the economic development of the country from 2013 to 2018 as the "Albanian Miracle". Some macroeconomic crises had eased. After a steady free fall in the previous three years, GDP growth had accelerated. However, despite the progress, Albania has remained among the poorest countries in the Balkans - and has been particularly economically affected by the global pandemic.
Albania's economy is among the least diversified in the region, according to Atlas of Economic Complexity of the Harvard Kennedy School Growth Lab. Two sectors, information and communication technology and travel and tourism, dominated export growth, according to Atlas data from 2019.
A country's ability to export a wide, complex range of goods and Services is essential to economic growth, Growth Lab research found. Albania's limited goods and Services contribute to its lagging behind peer countries, leaving it even more vulnerable to inhibitory events like Covid, which destroyed the tourism industry.
Harvard researchers point to foreign direct investment as the crucial hinge to promote Albanian economic growth.
"Foreign direct investment is extremely important for accelerating the pace of economic growth," said Harvard Kennedy School economic researcher Tim O'Brien, "because Albania needs to diversify into more industries." Investment can introduce new sources of knowledge from abroad, allowing Albanians to produce new goods and Services.
Albania must become an attractive country for investors
Proponents of foreign investments emphasize several factors that should attract investors to Albania. That is, wages are low. After an increase in April this year, the minimum wage is 32,000 ALL per month, equal to approximately $1.78 per hour. This, together with Kosovo's minimum wage, is the minimum wage lowest in the Western Balkans. Normally, foreign investment would be forthcoming, given the decades-long trend of companies outsourcing labor to developing countries to maximize profit.
"Investing in Albania would also help expand the market footprint of international investors, leading to higher profits," said Shehaj. This factor, together with the geographical location of Albania as a tourist attraction, said Shehaj, should make the country an attractive investment for companies.
"These would be all the ingredients that national corporations would need to meet their demands and meet their profits in the case of Albania," said Shehaj.
Despite these advantages, foreign companies have been deterred from investing in Albania for a number of reasons, including persistent systemic corruption.
Albania scored a score of 36 on the 2020 corruption perception index, according to data from Transparency International, a non-profit organization that monitors corruption around the globe. This figure measures the level of perceived corruption in a country's public sector on a scale of 0 to 100, in which countries scoring close to 0 equate to higher levels of corruption.
Albania's neighbors in the Western Balkans, Kosovo, Serbia and Montenegro, had a score of 36, 38 and 45.
Harvard's Tim O'Brien points to Albania's challenges with electricity and transportation problems as other factors that scare off potential foreign investors.
"The [Albanian] government needs to be a more active player to put itself on the map and overcome some of its bad reputation," O'Brien said.
"If you'd asked a decade ago, I would have said, 'Well, the power system is just underwhelming,'" O'Brien said, "But this part is OK, it's not great...there are some challenges , but the scope for efficiency in seeking FDI is there. A more proactive Albanian government should encourage foreign companies with various locations in Albania to establish operations and continue working with them."
In an article written last month, O'Brien and Daniela Muhaj, formerly an economics scholar at Harvard's Kennedy School, write that strengthening Albania's targeted investment promotion would produce “better quality work, faster convergence with the income levels of the rest of Europe. and ultimately less immigration.”
What difference would this bring to the ordinary Albanian?
According to a study by Economics, published in 2021, foreign direct investment can help reduce poverty in the Western Balkans, but only, the authors suggest, alongside strengthening government rule.
The study found that foreign investment is particularly beneficial when it introduces new capital to the country, which can then affect local welfare through technology transfer or employment.
On the other hand, the authors note, forms of investment that do not produce anything new—such as mergers and acquisitions—can actually increase unemployment. To ensure that investments benefit locals and not just foreign businessmen, the study says the government could, for example, bar FDI from penetrating key industries or small enterprises that can easily compete with peers. their foreign.
Even seemingly "green" types of foreign investment can also face public opposition. A growing interest in hydropower across the Balkan rivers has faced some Divergence because of its environmental impacts on agriculture, WATER and local biodiversity.
In general, the consensus of experts is that the Albanian government has not done enough to attract FDI.
"From McDonald's to Apple or car companies - all these institutions have their tents in every country," said Shehaj. "But they are not as present as you would think in Albania. The idea is that Albania has not done much to absorb these FDI."
As for the possibility of change in attracting foreign direct investment to Albania, Shehaj said the Albanian government will need to promote and push for more legislative and policy changes—unlike the ineffective law passed in 2016. In the past, he said Shehaj, Albania has also focused a lot of its efforts to support domestic investors over international investors.
"The beneficiaries of those government contracts have been people closely connected to the government, which means it's kind of like a system where they care about their own more than attracting FDI," Shehaj said.
But recently, said Shehaj, Albania has taken measures to address these issues. The pandemic, which curbed foreign direct investment around the globe, has made it even more urgent to attract new investors to Albania's economy.
"It will be a partnership from which all mutual parties will benefit, because Albania offers great tourism and potential for growth, which will be attractive to investors", said Shehaj. "But the government of Albania is finally ready to expand its FDI, because at the moment it is being damaged and needs FDI to recover the economy".
In order to attract FDI, Shehaj said that there are three tactics that the Albanian government should consider. One is targeted investment promotion, in which a country identifies and targets specific companies to invest in Albania. The other is the country's law on strategic investments. Both, Shehaj said, should help create attractive conditions for foreign investors. The Albanian Investment Corporation, an organization that aims to promote innovation and cooperation with different companies, can also help promote FDI.
"If Albania does not target companies, then it will continue to lag behind", said Shehaj. "But if it provides sustainable legislation or if it gives incentives to institutions as to why different countries should invest in Albania, I think this will give optimal results in the long run."
Each of these factors can help raise Albania's score for the Ease of Doing Business index of the World Bank of 67.7, a score that places it in a much lower position than neighboring countries, including Montenegro, Kosovo, Serbia and North Macedonia.
Even then, some economic experts believe that significantly attracting more foreign investment will require additional adjustments to various laws, including the law passed in 2016.
"If there is good political and institutional will, Albania has all the possibilities to overcome these challenges and make a strong turn towards opening the potentials for strong economic growth", said Jaco.
And this political and institutional will can emerge slowly.
At the first meeting of the Investment Council held this year, the Minister of Finance Delina Ibrahimaj announced a series of recommendations that could improve Albania's future for FDI.
A total of 194 recommendations have been identified, which have been categorized into 27 topics that will help improve the business climate and foreign direct investments", Ibrahimaj said at the meeting held in January.
The Ministry of Finance and Economy and three other institutions have started work on their implementation.
But when the Minister of State for Enterprise Protection, the Ministry of Finance and Economy and the Albanian Investment Agency (AIDA) were asked why Albania is lagging behind in foreign direct investment, they refused to answer.
