It is not without doubt that the current global economic crunch has had a toll on most countries in Europe. Most of the countries have had their economic growth stalled, having been termed as the worst of the economic downturn in recent times, according to most economic analysts. Most of the economy in Central Europe is sheltered under the European and Monetary Union, and with help from the European Central Bank, the European Union works together to maintain credit flow across the region for businesses and also for households. To achieve regional stability the region tries its best to place financial governance, and in the long run, make job access easier for its citizens. While facing this particular global crisis, the region has had to pump a bit more than €2 trillion in order to support the banking system, allowing consequent guarantees for further lending to take place (Europa, para.1).
Even with the regional government’s intervention through the global financial and economic crisis, the region’s businesses have felt the pinch in more ways than one. The paper looks at how much the region has been affected by this crisis that has rocked virtually the entire world, specifically looking at what effect it has had on the Balkan country of Albania. The paper touches intently on the crisis’ effect on businesses that are owned by individuals and companies in Albania, and also gives an analysis on the effect on foreign investment, that is, whether foreign investors have benefited or have lost while doing business in Albania.
Central Europe and the Crisis
Not only has the global economic recession slowed down the economic growth in the region but also has done a great deal in making the region go through an economic recession. A dramatic surge in the Central European Growth Domestic Product (GDP), since 2002- 2006, is a good indicator as to how much the region has been affected by this downturn (Sletzinger, para. 3). So drastic was the recession through this period that even after gradual recovery, the growth has had to rely on extensive borrowing to maintain its economic status. An account shortfall of above 5% has been experienced by all of the countries in the region except for the Czech Republic and Russia. Such countries as Bulgaria and Serbia have had figures going to as high as 20% interns of deficits. This has left these countries extremely vulnerable to the global economic crisis.
By the wake of 2008, certain countries like Latvia and Estonia were the only countries that would have been predicted to go through economic fallout, governments having had projected high rates of growth in their respective economies. By the end of the year though, consumption would decrease in most Central European States, most likely due to high household commodity prices and low purchasing power (Sletzinger, para. 4). Unemployment rates have generally risen everywhere. Due to the apparent credit crunch that has been seen, limited borrowing for investment is being experienced, while parent banks are not willing to give loans for domestic or individual purposes. Indebted countries in region are feeling heavy exposure since the terms that risks were once worked through are now being restructured. For the business community, the current crisis has hit the sector real hard since the confidence once experienced on consumers no longer is in existence. Generally, the economic statuses of the states that make up Central Europe are relying on the happenings of Western European countries like France and England.
The worst hit though is the Baltic countries which as yet have not maintained stability in their countries’ exchange rates. These countries experience a sharp surge in their GDP due to the decline of their currencies. Nevertheless, additional assistance from the European Union, with a little chip in by the Imperial Monetary Fund (IMF) will cause some of these states to come back to their feet (Sletzinger, para.4).
An Overview on Albania’s Economy
Since 1950, Albania has had heavy industry as its economic driver. This sector has been instigated through five- year- plan mechanisms which have been running for a long time. 1992 saw the country make a turn through economic reforms programs introduced by the government, yet because of the corruption in the government, these programs were stifled. These programs called for further devolvement of state-owned property and encouraged privatization of farmland. In addition, trade restrictions were removed and certain commodity prices were to be controlled. Real improvement in the country’s economy came about with the improvement in the service industry as well as the construction sector. This happened in early 2000s. A poverty reduction program facilitated by the World Bank and the IMF, to the tune of $38 million caused the country to be lifted from being viewed as poor state to a middle-income earning state. Its negotiations with the EU made further improvements in its economy in 2002.
Effect of Economic global Crisis on Albanian Businesses
It was expected that since Albania was not a strong economy as compared to the other states in the region, the economic meltdown would affect the country much less, even to the point of not shaking up its overall economy. Businesses were expected not to have a major shake-up in terms of numbers but that was not the case as Bosticky (para.2) puts it. Some of the economic indicators, as she puts it was analyzed and to their surprise, many businesses registered negative points, meaning that the businesses were gradually being affected by the situation that had just occurred. An economic indicator on sentiments showed a slight decline of 5%. This was analyzed to be due to a decline in the construction sector’s confidence. A negative was assessed in both the internal and external demand for purchasing of houses and other property (Bosticky para.3).
Another indicator that Bosticky looked at is the Industry confidence one. As she puts it, it had dropped by 0.6%. This was attributed mainly to the negative decline in the production power of the industries in Albania. The domestic and external demand for products from this industry declined. In essence, less was being purchased and less was consequently being produced. The domestic and foreign regular consumer was not willing to spend the amount of money he previously used to spend in purchasing industrial products.
If that was not all, the Construction Indicator saw a drop of 12.8%. Bosticky explains that this was the lowest degree to which the construction industry had declined since 2002. This was therefore more than a coincidence seeing as the global crunch had just ended. Employment in the construction industry saw a 5.2% drop since all of the employers rely on the availability of investors to secure construction projects. In a nutshell, both construction and related businesses therefore saw a further decline by 19.3%.
The services sector also saw a drop. The 0.2% decline was blamed squarely on the fact that the government had for so long encouraged an informal economy. It also gave some blame to banks for poor control and policies that would see the release of loan funds available. Consequently, most employers in the service sector were not looking to employ more people as staff members in their companies in the dawn of 2010. Finally, consumer purchasing confidence also was seen to have a decline. This was definitely an indicator that more and more consumers were opting to save, rather than purchase goods. A rise in the cost of living is another reason why there was a 0.5% decline in the confidence of the consumer. There is a general state of unemployment in Albania, yet due to recent reforms in the economy, this state is bound to suffice (Bosticky, para.6).
Generally, Albania has been hit economically through the recession that has overtaken the world just recently. This as it is explained has been greatly attributed to the policies the banks undertake in awarding loans to potential customers. The last quarter of the year saw the economy of the country still at a decline yet many predict that Albanian economy will soon start registering positive growth as 2010 signs of progress and as the world in general gets past the economic crunch that it has recently faced.
Global Economic Effect on Albanian Foreign Investment
As it would have been expected, the global recession would have attracted less and less foreign direct investment in most parts of central and southern Europe. The estimates in the a development bank in the European construction industry showed that foreign investment in Albania, as in other Balkan countries went down by almost half what was awarded to them in 2007. This amounted to an estimate of $27 billion.
Having been rated as the poorest of the countries among the Central and Southern European territory, the country would not have been explicitly affected by the economic crisis (Barkoukis, para.4). The damage done to the nation due to the crisis could not compare to what the other countries went through in terms of monitory value. In addition, Albania was a developing country. Technically speaking, the wake of the year 2009 saw many countries emerging once again from the surge that rocked the world. Foreign investor companies were hungry to advantage of the situation and most of their “catch” is found in developing countries that show potential for economic growth. Albania was one such country.
Australian multinationals were therefore interested in developing Albanian in such sectors as the roads and highway infrastructure, property sector, energy and tourism. By improving the country’s purchasing power the multinationals would benefit from the diplomatic relations that these countries offered. The government therefore encouraged foreign investment to help the country stand from what seemed to bring the country almost to an economic standstill. It did so by encouraging foreign investment t take over some of the sectors it had consequently privatized, for example, the telecommunication, oil, and construction departments.
Since the infrastructure in Albania was currently inadequate to facilitate investment, the government encouraged major road reconstruction through foreign investors. By 2013, 6000 km of tarmac high profile highways will have been done through such projects as the investors are undertaking. Australian-based Civil Engineering investors have therefore taken up this opportunity to improve the road network in the region. Tied up to the step the government is tanking in attracting foreign investment is the move it is making in bringing down the average time that anyone is allowed to start a business. Initially, a period of 13 days was required for a business to be initiated in the country. Today starting a business and registering will take you at least five days. Though the cost of starting a business is still relatively high, the government is showing a relatively positive improvement in trying to attract foreigners to the country’s economy.
Obtaining credit is now easier in the country and this is shown by the leap it has taken to be part of the top 10% of the Central European countries as pertains to credit facilities. It has over the past two years advanced its business investment areas so as to be ranked 15 out of a possible 183 countries. Workforce employment has increased due to this and this shows how determined the government is in making foreign investment work out in the country.
The global economic crunches, despite having a hard hit on the business communities that have been in the country for long have made a positive impact on the country. It has attracted massive foreign aid through the IMF and the World Bank and also has aided in attracting foreign investment in the country. To some extent, the country is almost thankful for the effect caused by this particular situation that took on the world.
The country in question is a developing country yet it shows a lot of potential in becoming like the other economic powers in Europe. Despite the economic crisis that has just ended, and the frequent complaints about the corrupt nature of the government, coupled with bad banking and investment policies, Albania is currently on its way to economic recovery. In the next couple of years, it is bound to emerge as a viable competitor in many of the sectors that it has not done well in over recent times. Such sectors as tourism, construction industry, and the energy industry have been given a push by the foreign investments through the government and international organizations and these are making the country’s economy grow exceedingly fast. Barkoukis (para.10) concludes that investors in business and property need to watch out keenly for Albania. He puts it clear that now, just after the economic recovery, is the best time to jump in as investors, since there is a lot of potential in the country. This is so until when the country needs to resolve its political issues in late 2010 when things will now eventually stabilize for a longer period.
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- Sletzinger, Martin. “Central and Eastern Europe and the Global Financial Crisis: Heightened Risks and Rising Vulnerabilities”. East European Studies. 2009.