SEMINAR VOLUME OF THE SECOND EUROPEAN DOCTORAL SEMINAR (EDS)

SEMINAR VOLUME OF THE SECOND EUROPEAN DOCTORAL SEMINAR (EDS)
SEMINAR VOLUME
OF THE
SECOND EUROPEAN DOCTORAL SEMINAR (EDS)
Heinz-Dieter Wenzel
Stefan Hopp
(Editors)
Working Paper No. 43
February 2003
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BERG Working Paper Nr. 43, February 2003
SEMINAR VOLUME
OF THE
SECOND EUROPEAN DOCTORAL SEMINAR (EDS)
Bamberg, Germany, June, 4th – 6th, 2002
Edited by Heinz-Dieter Wenzel and Stefan Hopp
Preface
The European Doctoral Seminar (EDS) has been established in 2001 as an institution to facilitate and promote the academic exchange among young economics scholars from Bamberg,
Tirana, Budapest and Sarajevo. Since its inception, seminars have been conducted in Budapest (September 2001) and in Bamberg (June 2002). In 2003, the Universities in Tirana and
Sarajevo will be the hosts of the third and fourth European Doctoral Seminar, respectively.
For the participants, each seminar provides a unique opportunity to discuss one’s scientific
work with peers from three other nations. This diversity of social and academic backgrounds
may provide a fertile breeding ground for the eventual advancement of our science, a prospect
that crucially depends upon the intellectual curiosity and integrity of each individual current
and future economist.
The EDS volume, like the present one, provides a medium to communicate some of the ideas
presented throughout the seminar to a wider audience. Though the contributions in this volume include comments and suggestions made at the seminar, they ought to be considered as
preliminary results of the ongoing research processes of the respective participants. Therefore,
further comments and suggestions on the scope, nature and method of the subject matter will
certainly be welcome by everyone. A complete list of all seminar participants, including
email-addresses and academic affiliations, is included in this volume.
The contributions for the present volume have been divided in three sections. Section one
contains a theoretical paper from the field of development economics that scrutinizes circular
flow systems for underdeveloped nations. Applied papers on selected aspects of the Albanian
economy are presented in Section two. The topics here range from an analysis of the monetary transmission mechanisms, and an evaluation of selected IMF programs to the policy implications of the variability of the Albanian exchange rate. The third section encompasses one
paper on home financing in Hungary and two papers on the economic system in BosniaHerzegovina.
The editors would like to thank the EDS organizer, Dr. Volker Treier, for preserving through
all the setbacks one normally encounters when responsibly organizing such a seminar. Last,
but not least, we would like to express our thanks to the German Academic Exchange Service
(DAAD) for the pecuniary support of the EDS.
Bamberg, February 2003
Prof. Dr. H.-D. Wenzel
Head of the Bamberg Economic Research Group (BERG)
Stefan Hopp
TABLE OF CONTENTS
Page
Preface
I.
DEVELOPMENT ECONOMICS
1.
GUNTHER GRATHWOHL:
The Macroeconomic Structure of Less Developed Countries
3
II. RESEARCH ON THE ALBANIAN ECONOMY
2.
3.
4.
5.
6.
7.
ARJETA ABAZI:
Albania and its Monetary Transmission Mechanism
27
DORIANA DERVISHI:
The Countries of Region and the Challenge of Economic Integration
35
ERMELINDA FEJZULLA:
A Review of the Controversies and Evaluation Approaches on the
International Monetary Fund’s Supported Programs
43
ARSENA GJIPALI:
Emigration and its Economic Consequences; the Transition Phase of Albania
63
ELIDA LIKO:
Exchange Rate Variability and Policy Implication
71
SUELA THIMO:
The Increase of Competition: an Important Factor for a Successful Transition
83
III. RESEARCH ON OTHER TRANSITION ECONOMIES
8.
9.
DOBRICZA ANIKÓ:
A Debt Rate Paradox: Why is home financing not as effective as it was
thought to be?
DŽENAN DONLAGIĆ:
Monetary Policy in Bosnia and Herzegovina – Currency Board Arrangement
97
105
10. ADNAN EFENDIĆ:
Specifics of Transition Process in BiH – Framework of Development Strategy
for BiH
111
Seminar Participants
119
Seminar Program
123
Part I:
Development Economics
Page
GUNTHER GRATHWOHL:
The Macroeconomic Structure of Less Developed Countries
3
Gunther Grathwohl
The Macroeconomic Structure of
Less Developed Countries
1. Introduction
All modern macroeconomic analysis is based on the study of circular flows. In the
middle of the 18th century the French court physician François Quesnay introduced the
circular flow idea (tableau économique) into economic theory, in analogy to the
conception of blood circulation which had been detected more than 100 years earlier.
Using the circular flow scheme enables us to arrange the numerous economic
proceedings by focusing only on those flows of goods and services which take place
between a few aggregate categories (sectors, classes) within a certain period. The
circular flow theory states that nothing “falls out” of the whole system, or in Quesnay’s
words: “all that is bought is sold, and all that is sold is bought.”1 While the Physiocrats,
under Quesnay’s leadership, split the economy into an agricultural and a nonagricultural sector, it is hard to find this basic scheme for industrial countries within
modern macroeconomics today. Usually, the production of agricultural and nonagricultural goods is aggregated within one single production sector. Though, some
models permit the production of various goods,2 the basic separation between an
agricultural and a non-agricultural sector with its respective household-sectors is no
longer required in a macro-model for a modern industrialized economy.3
The attempt to analyze the macroeconomic structure of less developed countries (LDC)
in general turns out to be rather difficult: this group of countries is too heterogeneous
regarding its size, historical background, endowment of resources and factors,
significance of the governmental sector, type and importance of the industrial sector,
etc…4 Nevertheless some common structural features may be identified for LDC.
Usually, the process of economic development starts with the emergence of a nonagricultural sector within a large agricultural economy. Basically, the appearance of a
new sector is enabled by increases in agricultural productivity or by building an
“industrial bridgehead”, organized by foreigners (e.g. colonizers). For the large majority
of today’s LDC the contribution of foreigners - although they did not need to appear
necessarily in form of colonizers - to the formation of their industrial sector has been
rather significant.
In general, the new creating non-agricultural or industrial sector does not follow the
same organization and production scheme prevailing in the agricultural sector. The
diversity of the sectors is demonstrated on the one hand by different types of the
1
The quotation is taken from Blaug, M. (1985), p. 28. This statement is principally valid in a barter
economy or if we consider money as a pure medium of exchange. Furthermore, admitting intertemporal
trade with debt claims and liabilities would not change the assertion.
2
Examples for models with various goods are:
• “Two-sector-models” of Shinkay, Y. (1960) and Uzawa, H. (1962), which distinguish between
the production of consumption and investment goods.
• Models which differentiate between tradable and non-tradable goods (so called “Australian”-,
Scandinavian”- or “dependent-economy”-model); an overview gives Dornbusch, R. (1980), ch.
6, pp. 93-116. These types of models are sometimes employed by development economists; cf.
Agénor, P.-R./Montiel, P.J. (1996), pp. 48 ff.
3
One possible reason for this may be that similar production technologies are employed in both sectors.
4
Cf. e.g. Todaro, M.P. (2000), p. 33.
Gunter Grathwohl
4
produced goods: one sector produces food, the other sector raw materials or other
industrial commodities, called manufactures. This asymmetric production structure
frequently led to the suggestion that the manufacturing sector depends on the food
producing sector. On the other hand, both sectors are characterized by institutional
differences, e.g. concerning the determination of factor payments or the structure of
factor inputs. Consequently, we usually find some limitations regarding intersectoral
factor mobility. A huge discrepancy in the productivity of labour might be regarded as a
symptom of sectoral heterogeneity (cf. table 1):
Table 1:
Region
South Asia
East
Asia
China)
Latin America
Africa
Agricultural Production and Employment in LDC, 1995.
(including.
Percentage of
Employees in
Agriculture
64
70
Percentage of
Agricultural Production
in Total Production (GDP)
30
18
25
68
10
20
Source: World Bank, World Development Report 1997: The State in a Changing World, annex, tabs. 4
and 12, adopted from Todaro, M.P. (2000), S. 366.
Although a substantial part of population in LDC is employed within the agricultural
sector (particularly in Africa and Asia), the output share of that sector is much smaller.
Furthermore, considering that one part of the agricultural production, like exportoriented plantations, is produced by relatively capital-intensive methods, we find an
even lower productivity for the remaining traditional producing small-scale peasant
farmers.
Hence, from the macroeconomic point of view, the disaggregation of LDC into two
sectors may be justified by the demonstrated sectoral heterogeneity. Depending on the
related problem we distinguish the sectors according to the goods they produce
(agricultural/non-agricultural) or according to the production method they apply
(traditional/modern). For example, if we are interested in questions about the industrial
sector’s dependency on the agricultural sector’s food production, a distinction according
to the respective produced goods seems to be meaningful. On the other hand, problems
related with the limitations of factor mobility require a framework which differentiates
between the organization and production methods applied. In the present context I want
to proceed on the assumption that the kind of goods and the kind of production method
correspond to each other: usually, agricultural goods will be produced by traditional
labour-intensive methods, non-agricultural goods, particularly industrial goods, by
modern methods (capital-intensive).5 Moreover, I suppose that services occur only
within the industrial sector and will be produced by the same production methods like
industrial goods.6
The paper at hand presents two macroeconomic circular flow schemes which take into
account as well the sectoral heterogeneity as the relations between LDC and foreign
5
Although there might be examples demonstrating the opposite. However, the very low labourproductivity in agriculture shows that agricultural goods are produced until today with very low amounts
of capital employed.
6
Later, during the course of development, there has been frequently emerged a huge service sector within
large agglomerations where labour-intensive production methods predominate. The so called informal
sector should be considered separately. Cf. Gupta, M.R. (1997), p. 409 for modelling the informal sector
and the given literature there.
The Macroeconomic Structure of Less Developed Countries
5
countries. The first circular flow describes an agrarian structured (subsistence)economy which is complemented by an industrial organized exporting-sector. This
sector has been induced by foreigners. In accordance with Fei and Ranis I would like to
entitle this type of economy open agrarian economy.7 One special feature of the open
agrarian economy is the fact that the domestic residents do not save at all. This implies
that the industrial sector, using capital inputs for production, can only build up by
foreign savings. This assumption may be justified particularly for LDC which are just
passing through a very early state of the development process.
The second circular flow scheme also describes a two-sector-economy, connected to the
rest of the world, the so called open dual economy. Like the open agrarian economy the
second type is also characterized by the existence of two different organized production
sectors (agricultural/non-agricultural). The main difference regarding the first type
might be the abandonment of the restrictive assumption that residents are not able to
save. Consequently, residents obtain possession of shares of the capital stock; now the
other extreme case would be feasible: financing the industrial sector wholly by domestic
foreign savers.
Both circular flows are expressed in physical terms, respectively in food units; monetary
flows are ruled out here.
2. The early phase of the development process: The open agrarian economy
The following chapter presents a typical circular flow scheme of an economy that gets
in touch with “modern” production methods induced by foreigners. Those foreigners
come from industrializing or industrialized countries and appear initially as traders.
They intend to export goods into their home countries that cannot be produced there or
at very high costs. Those goods represent both: raw materials serving as inputs in their
home country’s industry and exotic consumption goods enjoying great popularity there,
like bananas, tea or coffee. The high demand in their home countries motivate the
traders to change their profession and they become entrepreneurs extending and
promoting not only the export but also the production of the requested goods,
employing their own (modern) production methods.
The situation outlined describes the colonial phase of many African and Asian LDC
during the 19th and early 20th century in order that we could talk about the circular flow
of a “colonial economy”. Nevertheless, I prefer the expression open agrarian economy
(OAE) because the present scheme is not confined to colonies but considers typical
structures of all countries getting into contact by foreigners with external trade and
modern production methods.8
The new economic actor in the OAE is the foreign entrepreneur. For production he
needs domestic labour and a capital stock, changing by the way the structure of the
agrarian oriented economy. In the following sections I will present each sector and their
actors. The circular flow scheme (figure 1) reflects both sectors of the economy
explicitly and considers as well the familiar macroeconomic accounts9 as the factor
endowments of the related economic units. The direction of the arrows in figure 1
corresponds to the direction of real flows of goods and services.
7
Cf. Fei, J.C.H./Ranis, G. (1997).
In Latin America the colonial phase was over at the beginning of the 19th century. Some African and
Asian countries (Ethiopia, Afghanistan, Nepal, large parts of China) have never been governed by
colonizers.
9
The following accounts belong to the usual accounts of a national accounting system: product account,
income account, saving and investment account and the rest-of-the-world account.
8
6
Gunter Grathwohl
2.1. The rural sector
In the beginning of the development process rural communities form the only economic
sector. Within these village communities almost all production capacities are
concentrated on foodstuff cultivated by rather low productivity. Besides, a modest nonagricultural production sector with small scale craft business or services and an
administrative or religious leadership may coexist, surviving from and depending in size
on the farmer’s food production surpluses. In the present framework I will neglect those
non-agricultural activities within the rural sector in order to keep the circular flow
scheme less complex.10 Furthermore, no distinction will be made between landlords and
farm-workers or tenants. Subsequently we need not care about the numerous feasible
contractual relations or lease agreements that prevail between the landlords and the rest
of the rural population.
The protagonist of the rural sector is a representative rural family farm appearing as
the owner of both production factors: it possesses not only the arable land but also
supplies the labour necessary for food cultivation. Before the exporting sector comes
into sight, family farms turn out to be wholly autarkic. They can be regarded as
“producing households” making their production and consumption decisions
simultaneously. By means of the production factors labour ( L ) and land ( T )
agricultural goods, particularly food, will be produced ( QA ) .11 Capital inputs are not of
great importance; instead human (and animal) labour force is employed together with
natural fertilizers and traditional cultivated seeds. Let us symbolize that part of the
labour force that is engaged in rural-sector-production with L A . The rest of the
country’s whole labour endowment ( L E ) is employed within the exporting sector. A
distinction between skilled and unskilled labour is not made here. Hence, aggregate
labour which is constant in the short run can be expressed as the sum of both sectoral
labour inputs:
(2.1)
L ≡ L = LA + LE .
The second rural production factor land should also be considered as constant in the
short run, meaning that all available arable land has already been cultivated; it is used
exclusively inside the rural sector:
(2.2)
T =T .
This assumption implies a rather low marginal productivity of labour in case of high
density of population applying the law of diminishing returns.12
The rural sector production technique may be described by a linear homogenous neoclassical production function13 ( FA ) (e.g. Cobb-Douglas-style):
10
The circular flows of a pre-industrialized (European) economy are described in detail by Jánossy, F.
(1979).
11
Capital letters are symbolizing aggregates.
12
Diminishing returns in case of high population pressure is the central idea of the „labour-surplus
economy“, firstly formulated by Lewis, A. (1954) in his path breaking article. Labour-surplus-models
reflect particularly the circumstances in Asia, while the situation of some African countries may be better
described by “land-surplus-models”.
The Macroeconomic Structure of Less Developed Countries
(2.3)
(
QA = FA LA , T
7
)
Farmers produce a homogeneous agricultural good (foodstuff) that is neither sold nor
bartered to a large extent and is used mainly for personal consumption ( CS )
(subsistence economy). Further, a possible surplus of production may be sold or paid
over to the new industrial sector; according to Fei and Ranis I am going to call this
surplus total agricultural surplus (TAS)14. The following equation reflects the real
output of the rural sector:
(2.4)
QA = CS + TAS
The output-level and the family farmer’s real income ( YA ) are identical if we neglect
intersectoral intermediate trade and transfers:
(2.5)
YA = QA .
The output can be distributed totally among both production factors ( L A and T ):
(2.6)
QA = wA LA + rrT T
YA
There is no need to determine the exact amount of wage w A and land rate rrT here,
since we do not differentiate between landowner and farm worker.15 The representative
family farms receive the whole composite of factor payments; the per-capita income
should be close to the subsistence level.
The family farmer’s income spending is described in the following way: If we assume
that due to the low income level no savings are generated, the entire income is
consumed. As mentioned above, the lion’s share of output (or income) is produced (or
spent) for personal consumption. Within this macroeconomic context, personal
consumption can be interpreted in a somewhat broader sense: it does not necessarily
refer to the single family farms but to all family farms as a whole, meaning that one part
of their production is consumed by themselves and another part may be bartered for
similar food stuff produced by their neighbours. Of course, from the macroeconomic
point of view such transactions are netted out.
Next, the remaining surplus of production (TAS) is supplied and exchanged for nonagricultural products on an (intersectoral) commodity market.16 Thus, we are able to
13
A linear-homogeneous production function means a production function with the degree of
homogeneity of one.
14
Concerning the emergence of a TAS within a labour-surplus-economy see Fei, J. H. C./Ranis, G.
(1964).
15
Generally, the two-sector-models of the labour-surplus-economy suggest that the wage rate is
determined by average productivity since the marginal productivity of labour is zero or close to zero
which would be below the subsistence level. However, more recent studies about sharecropping
arrangements yield opposite results: wage rates frequently stay behind their marginal products. Cf. e.g.
Rosenzweig, M.R. (1988) or Todaro, M. P. (2000), an overview about sharecropping is given by Singh,
N. (1992).
16
Assuming that the TAS is not taxed by an authority like in pre-industrial feudal systems; concerning
this point cf. Jánossy, F. (1979).
Gunter Grathwohl
8
divide the application of income into personal consumption of family farmers and
consumption of a non-agricultural good. As we will see below, this non-agricultural or
industrial good ( CM ) 17 at the price PM refers to a commodity imported from the rest of
the world. But only the part γ ( with 0 < γ < 1) of the total import value is consumed by
rural family farmers, the remaining part is consumed by the households of the second
sector. Choosing the price of food PA as numéraire and applying the relative price
P
pM = M , income spending or absorption of the rural family farms may be expressed
PA
by the following equation:
(2.7)
YA = CS + γ pM CM
Some agricultural goods (TAS) are sold to the new sector while the family farmers
receive various commodities in return ( γ pM CM ) . We will call this kind of trade
intersectoral trade, consisting in a way of intersectoral im- and exports, and express the
correspondent intersectoral trade account ( TA A ) - from the point of view of the rural
sector - by the following equation:
(2.8)
TAA = TAS − γ pM CM
From equations (2.4), (2.5) and (2.7) follow that the value of goods sold to the new
sector and the value of goods received by the new sector must be equivalent. In analogy
to the macroeconomic standard-identity of savings and investment we derive a similar
accounting identity in form of a “balanced” intersectoral trade-balance:
(2.9)
(2.9a)
TAS ≡ YA − CS ≡ γ pM CM ,
TAS − γ pM CM = 0 .
or
All economic activities of the rural sector are summarized by the following basic
sectoral identity:
(2.10)
CS + TAS ≡ QA ≡ YA ≡
CS + γ pM CM
absorption of the rural sector
( income spending)
+ TAS − γ pM CM
TA A
On the left hand of equation (2.10) we find the rural sector’s output which is equivalent
to sectoral income. Again, sectoral income is expressed by the sum of the family
farmer’s total demand (rural sector absorption) and the net-demand of the nonagricultural sector (intersectoral trade account). As a consequence of the lacking of
savings we are able to derive two specific features: On the one side the absorption
coincides with the application of income, on the other side the intersectoral trade
account is (ex-post) balanced.
17
From now on, the terms non-agricultural and industrial are considered as synonyms.
The Macroeconomic Structure of Less Developed Countries
9
2.2. The exporting sector
The exporting sector represents the new, foreign influenced sector. The name exporting
sector reflects the assumption that the whole sectoral output will be exported to the rest
of the world.18 One representative example for production is the exploitation of raw
materials used as inputs in the growing manufacturing plants of the (recently)
industrialized countries. In this case the whole production must be exported inevitably,
since manufacturing plants within the OAE still do not exist. Moreover, let us assume
that the predominant production methods are basically different from those employed in
the rural sector.19 On the one hand exporters may use the well-known technology of
their home countries. On the other hand, capital is the second employed production
factor in addition to labour, while land use plays a minor role; that is why it is neglected
in the exporting sector.
The protagonist responsible for the emergence and building-up of the new sector is the
foreign entrepreneur. While I am going to consider the export firm as domestic, it
should be emphasized that the entrepreneur is regarded as a foreigner, meaning that he
stays basically in his home country, spending his income there. In other words, his
income is not part of the national income of the OAE. The foreign entrepreneur
provides and owns the required real capital stock ( K ) , considered as constant during
the relevant period:
K=K
(2.11)
In addition to capital the entrepreneur uses the available domestic production factor
labour ( LE ) , i.e. that part of labour not employed in the rural sector (cf. equation (2.1)
). The labour force employed in the exporting sector has been recruited originally from
the rural sector, but now a new economic unit has established: the household of the
exporting sector (HHE). We may assume that it is only endowed with one factor: labour
( LE ) .
Similar to the rural sector, the applied production technology may be described by a
linear-homogeneous neo-classical production function ( FE ) :
(
QE = FE LE , K
(2.12)
)
A homogeneous good is produced and sold completely to the rest of the world at the
price PE . We express the output of the exporting sector in food units - and herewith the
whole export ( X ) of the OAE - if we multiply the produced quantity by the relative
price pE =
(2.13)
18
PE
:
PA
pE QE = pE X
As we will see below, within the new sector not only exports take place but also imports; this may be in
contrast with the rural sector where we do not find any direct international trade activities; thus the new
sector may be called the international sector as well.
19
Though, in reality, this has not been always the case. In South East Asia, e.g., export-oriented riceproduction has been realized by methods of traditional rice cultivation.
10
Gunter Grathwohl
Applying the adding-up theorem implies that the output can be decomposed in the sum
of the product of the respective inputs L E and K and their partial marginal

∂Q 
∂Q 

productivities  wE = E  and  rrK = E  . Thus, for the real wage share ( W ) we
∂LE 
∂K 


may write pE wE LE , the real share of the rental rate (for capital) ( R ) may be expressed
by pE rrK K :
(
)
(2.14)
pE QE = pE wE LE + rrK K ,
(2.14a)
pE QE = W + R
or
Within the exporting sector it seems to be rather plausible that factor payments are
determined according to the rules of profit maximization and, hence, correspond to their
marginal productivities.
The foreign entrepreneur receives the whole rental share and transfers it into his home
country, by the way pushing into deficit the balance on factor payments (BF):
(2.15)
BF = − R = − pE rrK K
On the other hand, the whole wage share is accrued by domestic households,20 implying
that the exporting sector’s income ( pEYE ) is nothing else than the wage share of its
employed workers:
(2.16)
pEYE = pE QE − R = W ≡ pE wE LE
Thus, the workers claim a part of the export production due to their labour input, but the
entire production of that sector will be exported. Let us assume that the entrepreneur,
trying to pay his workers, will import consumption goods to the amount of the wage
share. If we further take for granted that the rural sector production of foodstuff is
sufficient to provide the whole economy adequately, those imported consumption
commodities may be completely of industrial character. Only if this is not the case the
entrepreneur needs not only to import industrial commodities but also the required
quantity of food. In the present framework I will presume that exclusively industrial
goods will be imported, i.e. goods which have never been before within the described
economy. Thus, we can state that the value of the wage share (W ≡ pE wE LE ) coincides
with the value of the imported (industrial) consumption goods ( pM CM ) :
(2.17)
W ≡ pE wE LE = pM CM 21
Moreover, the foreign entrepreneur has the opportunity to enlarge his capital stock,
dependent on his profit prospects. For this reason he needs to import investment goods
from abroad as well since these types of goods are not manufactured within the OAE.
20
We assume that the foreign entrepreneur himself is not working.
21
Expressing the price of the industrial import good (PM), in terms of food yields pM =
PM
PA
.
The Macroeconomic Structure of Less Developed Countries
The imported investment good
( IM )
11
may not be different from the imported
consumption good, resulting that both goods have the same price ( PM ) . Hence, total
import ( pM M ) is given by:
(2.18)
pM M = pM C M + p M I M
W
Before aggregating all external economic relations in a rest-of-the-world account I will
have a look at income spending of the exporting sector’s households. From equations
(2.16) and (2.17) follows:
(2.19)
pEYE = pM CM
Assuming that per-capita income of the domestic exporting sector households is rather
low, the classical saving rule may be applied, i.e. wage earners do not save.
Consequently, while family farmers do not save as well, the entire domestic residents
will not save at all. Since the whole income of exporting sector households consists of
industrial consumption goods they have to barter a part of these commodities for the
rural sector food surplus (TAS) to ensure their own survival. For this reason they act as
traders while the rural family farmers acquire some of the imported industrial
consumption goods (cf. equation (2.8)) and the remaining part (1 − γ ) is consumed by
themselves. The sectoral application of income is expressed as follows:
(2.20)
pEYE = (1 − γ ) pM CM + TAS .
To depict the intersectoral trade from the exporting sectors’ point of view we have to
change the sign of equation (2.8). As was shown above, the intersectoral trade account
has to be (ex-post) balanced:
(2.21)
TAE = −TAA = γ pM CM − TAS = 0
Now, the rest-of-the-world (current) account of the OAE is described in the
subsequent manner. The (international) trade account can be derived by equations
(2.13) and (2.18):
(2.22)

TA ≡ pE X − pM M = pE QE −  pM CM + pM I M
  W




The balance of factor payments (BF) shows a deficit reflecting the outflow of the
foreign entrepreneur’s capital income:
(2.23)
BF = − R
Finally, the current account ( CA ≡ TA + BF ) is expressed by the sum of equations
(2.22) and (2.23)):
Gunter Grathwohl
12
(2.24)

CA ≡ TA + BF = pE X − pM M − R = pE QE −  pM CM + pM I M
 W +R
 W

−
R
 R

Equation (2.24) shows that the current account must be in a negative position if the
foreign entrepreneur imports investment goods, so if pM I M > 0 . It is well-known that a
current account deficit corresponds to an identical capital import ( Kim ≡ S F ) , so that
we can state S F = pM I M .22 This results from the assumption that domestic residents do
not save; thus, the investment financing has to be realized by capital imports alone, i.e.
by foreign savings ( SF ) . Let us summarize the described relations with the help of
the rest-of-the-world account (table 2):
Table 2:
The rest-of-the-world account of an open agrarian economy
rest-of-the-world account (current account)
pEQE
W
pMCM (imported consumption goods)
(commodity exports)
R
R (payments for imported capital use)
current account deficit ( = Kim ≡ S F )
pMIM
In accordance with equation (2.10) we formulate the basic sectoral identity for the
exporting sector:
(2.25)
W + pM I M
W + pM I M
W +R
W
W +R
R
pE QE − R = pEYE =
pM ( CM + I M )
+ pE QE − pM ( CM + I M ) − R
absorption of the exporting sector
CA
= pEYE = (1 − γ ) pM CM + TAS + γ pM CM − TAS + pM I M − pE QE − pM ( CM + I M ) − R
absorption of
exporting sector households
TA E
absorption of
the (domestic)
export firm
CA
The left side of equation (2.25) shows the income of the exporting sector expressed by
the difference between output and the rental payments flowing abroad. The right side
demonstrates that income corresponds to the sum of absorption and the current account.
Since the absorption is larger than income (W + pM I M > W ) it follows that the current
account is in a deficit position at the same level ( pM I M ) . The second line of equation
(2.25) is more differentiated and reveals not only international relations but also
intersectoral relations from the view of the exporting sector.
22
In a national accounting system this transaction enters on the “savings and investment account” (cf.
figure 1); the capital import deteriorates the OAE’s external position (creating a debt position).
The Macroeconomic Structure of Less Developed Countries
Figure 1:
13
The circular flow of an open agrarian economy
rural sector
exporting sector
rest of the world
R
K
W
export firm
pM ( CM + I M )
(product account)
pE QE
pE QE
family farm
S F ( Kim )
F(T, L )
pM CM
TAS
QA = CS + TAS
HHE
γp M C M (income account)
YA
wA LA
rrT T
T
LA
rest-ofthe-world
account
pEYE
LE
pM I M
savings and
investment
account
Gunter Grathwohl
14
2.3. The entire open agrarian economy
Adding-up both sectoral outputs yields the OAE’s real net domestic product (NDP).
From equations (2.4) and (2.13) we get:
(2.26)
NDP = QA + pE QE = CS + TAS + pE X
Further, output is portrayed by the sum of both sector’s demand (absorption) and the net
demand of the rest of the world (trade account):
(2.27)
NDP = CS + γ pM CM + (1 − γ ) pM CM + TAS + pM I M + pE X − pM ( CM + I M )
absorption of the
rural sector
absorption of the exporting sector
trade account
In the same way, national income (NNP) is given by the sum of both sectoral incomes
(cf. equations (2.5) and (2.16)):
(2.28)
NNP = YA + pEYE = QA + pE QE − R = NDP − R
Equation (2.28) demonstrates that national income coincides with domestic income net
the out flowing rental payments. In analogy with equation (2.27) national income may
be expressed by the sum of absorption and current account:
(2.29)
NNP = NDP − R = CS + γ pM CM + (1 − γ ) pM CM + TAS + pM I M + pE X − pM ( CM + I M ) − R
○ ○ ○
absorption of the
rural sector
absorption of the exporting sector
CA
3. The open dual economy
After establishing a new capital using sector, a transition process started in many LDC,
characterized by two extreme forms of production: traditional agriculture and modern
industrial manufacturing. During a successful development process, the size and
importance of the agricultural sector with respect to output and employment will be
diminished in favour to the industrial sector.
Those countries which just pass through the described phase of the development may be
best analysed by the huge variety of dual economy models found in economic
literature.23 All these models have in common that the depicted economy includes two
sectors: An “agricultural” or “traditional” or “backward” sector and an “industrial” or
“modern” or “advanced” sector. Beyond this basic common feature dual economy
models are rather heterogeneous and emphasize different sectoral asymmetries.
Frequently, the analysis is focused on intersectoral interdependencies while external
relations mostly do not play a key role.24
23
Cf. e.g. Jorgenson, D.W. (1961), Fei, J.C.H./Ranis, G. (1964), Higgins, B. (1956), Harris, J.R./Todaro,
M.P. (1970), Taylor, L. (1983). An excellent though not very actual overview of dual economy models is
provided by Dixit, A. (1973) or Kanbur, S.M.R./McIntosh, J. (1987).
24
Regarding open dual economy models see Findlay, R. (1984), p. 218 and quoted literature there.
The Macroeconomic Structure of Less Developed Countries
15
Neglecting further details of the specific models, I intend to present a circular flow that
depicts the basic structure of a large variety of the wide-ranged dual economy types.
The following flow system of an open dual economy (ODE) is characterized by:
(1)
The economy has external relations: The industrial product is international
tradable and can be exported. Besides, another foreign good is imported.
Moreover, foreigner’s ownership of the domestic capital stock may be allowed.
This last assumption follows the OAE framework where the whole domestic
capital stock has been possessed by foreigners.
(2)
Three commodities are produced worldwide: two domestic (food and
manufactures) and one foreign (another manufacture); now, we will not assume
anymore that the domestic manufacturing is entirely exported.
(3)
Savings are generated within both domestic production sectors. This implies that
as well rural as industrial households claim their share of capital payments.
(4)
(Real) Capital is used exclusively within the industrial sector, land only within
the rural sector, hence, both production factors are sector-specific.25
Now, let me present the single sectors and their actors. Figure 2 again shows the
graphical version of the present circular flow.
3.1. The rural sector
The situation of the rural sector has not changed a lot compared with its position in the
OAE. The protagonist of this sector remains the representative family farm, producing
foodstuff ( QA ) by means of labour ( L ) and land ( T ) . That part of labour employed
in the rural sector LA represents a part of the whole economy’s labour endowment; the
remaining part ( LI ) is used for industrial production, so we may write:
(3.1)
L ≡ L = LA + LI
All available arable land for food production has already been cultivated and cannot be
augmented in the short run:
(3.2)
T =T
Like in the OAE the applied production technology is given by a linear-homogenous
neo-classical production function ( FA ) :
(3.3)
(
QA = FA LA , T
)
Again, the produced agricultural good is used principally for personal consumption
( CS ) , the remaining surplus ( TAS) will be sold to the households of the industrial
sector:
(3.4)
25
QA = CS + TAS
At this point, the structure differs from the Harris-Todaro framework where both sectors employ labour
and capital (cf. Harris, J.R./Todaro, M.P. [1970]).
16
Gunter Grathwohl
The rural sector production generates a factor income at the same level, accrued entirely
by the representative family farmers. Thus, it is not necessary to determine the
respective wage w A and rental rate rrT here:
(3.5)
QA = wA LA + rrT T
factor income as a
result of rural sector
production
In contrast to the OAE framework we assume now that the family farmers will save a
certain amount of their income. Their savings contribute to the finance of the industrial
sector’s capital accumulation and let the farmers claim an according share of capital
payments. A necessary condition for that is the existence of a formal or informal capital
market, bringing together and balancing the supply and demand of financial resources.
For a moment it does not seem very plausible that rural families put forward the
capitalization of the industrial sector. But we have to take into account that we consider
a representative family farm which may be split into a landowner and a farm worker
household. The suggestion that at least the landowner makes his contribution to the
industrial sector’s capital accumulation seems to be more reasonable.26 Among others,
Fei and Ranis have emphasized this rural contribution and considered it as essential for
a successful development course. In the context of a closed economy it would be
conclusive that during the first stages of the development process the start-up finance
comes from the rural sector. Considering this, I now suggest to integrate the rural
sector’s possibility to take part in the capital formation process. Thus, the total rural
sector’s income is expressed by the sum of their production and that part of the rent of
the industrial sector’s capital stock received by the farmers ( R A ) :
(3.6)
YA = QA + RA
The income will be used for personal consumption, for intersectoral traded
consumption goods ( γ C ) and for (real) savings ( SA ) :
(3.7)
YA = CS + γ C + S A
The intersectoral traded consumption goods
( C)
could have been produced
domestically ( CI ) or imported from the rest of the world ( CM ) . Thus, we have two
different goods with different prices, expressing them in food units by their respective
P
P
relative prices pI = I and pM = M :
PA
PA
(3.8)
C = p I C I + pM C M
In the present ODE context, we do not only find pure commodity trade but also trade in
factor services, resulting in intersectoral income flows. The intersectoral trade
26
Particularly in Asia, the colonizer’s legal system has changed the rural ownership structures decisively,
strengthening the indigenous landlord’s position. Cf. Todaro, M.P. (2000), p. 376.
The Macroeconomic Structure of Less Developed Countries
17
account ( TA A ) and the intersectoral current account ( CA A ) (from the rural sector’s
view) are given by the following equations:
(3.9)
TAA = TAS − γ C
(3.10)
CAA = TAS − γ C + RA
From equations (3.4), (3.6) and (3.7) follow that rural savings are equivalent to the sum
of the intersectoral trade account and the capital incomes:
S A = TAS
− γ
C + RA
TA A
(3.11)
CA A
In analogy with the domestic and the national concept, we may distinguish between the
production (equation (3.12)) and the income concept (equation (3.13)) of the rural
sector and formulate two basic sectoral identities, summarizing by the way the rural
economic activities:
(3.12)
CS + TAS = QA = CS + γ C + TAS
− γ
C
absorption of the
rural sector
(3.13)
TA A
CS + TAS + RA = YA = CS + γ C + TAS − γ C + RA
absorption of the
rural sector
CA A
The production corresponds to the sum of absorption and (intersectoral) trade account,
the income corresponds to the sum of absorption and (intersectoral) current account. If
absorption is smaller than production (income), the trade account (current account) must
be in a surplus position. This surplus corresponds to an intersectoral capital export at the
same level, in other words: rural savings finance a part of the investment projects,
realized in the industrial sector.
3.2. The industrial sector
Within the dual economy, the industrial sector may be regarded as the engine of
economic growth and development. Like the OAE’s exporting sector, the industrial
sector uses capital and labour and can be considered as its “successor”. By
strengthening capital accumulation, output growth increases and rural sector’s (surplus)
labour might be absorbed. It should be emphasized, however, that the rural sector is
essential for the industrial sector’s expansion providing foodstuff and savings. Let me
now present the actors of the industrial sector. In contrast to the OAE, now a notable
quantity of domestic entrepreneurs exists, possessing a share of the capital stock. As
usual, we assume a constant capital stock during the relevant period:
(3.14)
K=K
Gunter Grathwohl
18
The remaining part of labour ( L I ) is used along with capital. Let us assume that
workers’ and entrepreneurial households together form the industrial sector’s
representative household ( HH I ) .
Once more, production is given by a linear-homogeneous neo-classical production
function:
(
FI = QI LI , K
(3.15)
)
PI
. Until now we
PA
have not already determined what happens with the merchandise. According to more
specific models, it might be completely exported, used at home or something inbetween. At any rate, the merchandise is a non-agricultural, industrial good with dual
use for (domestic) consumption ( CI ) , and (domestic) investment ( I I ) ; moreover,
The produced good is sold by the price PI , or, in food units, by pI =
demanded by the rest of the world ( X ) . If we consider a small country and the law of
one price holds, its price PI is given exogenously by the world market.
Furthermore, industrial sector’s enterprises import another non-agricultural good from
abroad. It may be also used as consumption or investment good and is supplied at the
P
(international) price PM , respectively pM = M . Hence, industrial consumption goods
PA
( C ) , investment goods ( I ) , import goods ( M ) , and total production of the industrial
sector ( Q I ) are expressed by the following equations:
(3.16)
C = pI CI + pM CM
(3.17)
I = pI I I + pM I M
(3.18)
pM M = pM ( CM + I M )
(3.19)
pI QI = C + I + pI X − pM M
The whole output can be split into the wage share (W = pI wI LI ) and the capital share
( R = p rr K ) :
I
(3.20)
K
pI QI = W + R
In the industrial sector we assume again that factors are paid according to their marginal
products. The capital payments are earned by the capital owners which may reside in
both domestic sectors or abroad. Hence, all capital payments can be divided into their
respective sectoral shares:
(3.21)
R = RA + RI + RM
The Macroeconomic Structure of Less Developed Countries
19
The foreign capital owner transfers his share back into his home country, charging the
current account; similarly, the rural capital owner transfers his share into the rural
sector, charging the intersectoral current account. However, the whole wage income
remains within the industrial sector and constitutes along with the payments of the
industrial sector’s capital owner the sectoral income ( YI ) :
(3.22)
pI YI = pI QI − ( RA + RM ) = W + RM
The representative households spend their income on the remaining part (1- γ ) of
industrial consumption goods, not demanded by family farmers, on rural foodstuff and
on savings ( SI ) :
(3.23)
pI YI = (1 − γ ) C + TAS + S I
In contrast to the OAE, households do no longer act as traders here; instead, enterprises
sell their commodities on markets to the households of both sectors and the rest of the
world. The intersectoral trade account ( TA I ) (current account ( CA I ) ) from the
industrial sector’s view corresponds to the negative intersectoral trade account ( TA A )
(current account ( CA A ) ) from the rural sector’s view (cf. equations (3.9) and (3.10)):
(3.24)
TAI = −TAA = γ C − TAS
(3.25)
CAI = −CAA = γ C − TAS − RA
We derive the following relation between the industrial sector’s investment and savings
account (left side of the equation), the intersectoral current account and the
(international) current account from the calculations of output (3.19), income (3.22) and
income spending (3.23):
(3.26)
pI S I = γ C − TAS − RA + pI X − pM M − RM
TA I
TA
CA I
CA
If industrial sector’s savings are not sufficient to match investment demand, the sum of
both current accounts must be negative, i.e a capital import (from the rural sector or
from abroad) occurs.
Finally, the basic sectoral identity of the industrial sector is expressed by (cf. equation
(2.25)):
(3.27)
pI QI − ( RA + RM ) = pI YI = (1 − γ ) C + TAS + I + γ C − TAS − RA + pI X − pM M − RM
TA I
TA
absorption of the
industrial sector
CA I
CA
The left side corresponds to the income and reveals its relation to the output. Again, the
income (the output) coincides with the industrial sector’s demand or its absorption plus
20
Gunter Grathwohl
the sum of intersectoral and international current account (trade account). If the
absorption is larger than income (output), the sum of both current account (trade
account) balances is in a deficit position.
3.3. The entire open dual economy
Corresponding to section 2.3 we will put the economy together and determine the levels
of national production, income and spending. Summing up the sectoral output levels
yield the ODE’s net domestic product (NDP) (cf. equations (3.4) and (3.19)):
(3.28)
NDP = QA + pI QI = CS + TAS + C + I + pI X − pM M
Also, NDP may be expressed by the sum of both sector’s (domestic) demand
(absorption) plus net demand of foreigners (trade account):
(3.29)
NDP = CS + γ C + (1 − γ ) C + I + TAS + pI X − pM M
absorption of the
agricultural sector
absorption of the
industrial sector
TA
In the same way, we get the national income or net national product (NNP), adding up
the sectoral incomes (cf. equation (3.6) and (3.22)):
(3.30)
NNP = QA + pI QI − RM = NDP − RM
Also, we formulate the NNP as the sum of absorption(s) and current account:
(3.31)
NNP = NDP − RM = CS + γ C + (1 − γ ) C + I + TAS + pI X − pM M − RM
TA
absorption of the
absorption of the
rural sector
industrial sector
CA
National wide income spending corresponds to consumption plus savings (cf. equations
(3.7) and (3.23)):
(3.32)
NNP = CS + TAS + C + S A + S I
Equalizing (3.31) and (3.32) yields the well-known (ex-post) identity of net financial
investment and current account balance:
(3.33)
S A + S I − I = pI X − pM M − RM
net financial
TA
investment
CA
If domestic savings are not sufficient to finance the domestic demand of investment, the
remaining part has been financed by foreign savings ( SF ) , i.e. net capital imports
( Nkim ) .
The Macroeconomic Structure of Less Developed Countries
21
4. Conclusion and preview
The present paper has dealt with the construction of two related circular flow systems27
in an open LDC-context, including two completed domestic sectors. Differences
between both frameworks are found according to their saving assumptions and the
industrial sector’s product type. Since in the OAE-context domestic residents do not
save at all, in the ODE-context they save in both sectors. Furthermore, within the OAEframework, the whole industrial production is exported, while the latter case suggests
that at least one part of industrial home production is demanded by domestic residents
as well.
Beyond these two frameworks, other variations seem to be reasonable, for instance the
assumption that only industrial sector’s households are able to generate savings.
The resulting basic equations may be used as the foundation for more sophisticated
macroeconomic LDC-models, concerning intersectoral and international questions.
27
Both circular flow systems are broadly founded on Fei, J.C.H./Ranis, G. (1997) and Ranis, G. (1988).
Gunter Grathwohl
22
Figure 2:
Circular flow of an open dual economy
rural sector
industrial sector
rest-of-the-world
W +R
industrial firm
pM ( C M + I M )
(product account)
pI QI
family farm
(
F LA , T
γC
)
pI X
I
C
(1-γ ) C
HHI
TAS
(income account)
pI S I
Q A = CS + TAS
Savings and
investment pI S F
account ( Nkim )
rest-ofthe-world
account
pI S A
YA
rrT T
pI YI
wA L A
T
RA
LA
W
RI
LI
K
RM
The Macroeconomic Structure of Less Developed Countries
23
5. Literature
AGÉNOR, P.-R./MONTIEL, P.J. [1996]: Development Macroeconomics, Princeton.
BLAUG, M. [1985]: Economic Theory in Retrospect, Cambridge.
DIXIT, A. [1973]: Models of Dual Economies. In: Mirrlees, J.A./Stern, N.H. (Hrsg.):
Models of Economic Growth, London and Basingstoke, S. 325-357.
DORNBUSCH, R. [1980]: Open Economy Macroeconomics, New York.
FEI, C.H./RANIS, G. [1964]: Development of the Labor Surplus Economy, Homewood.
FEI, C.H./RANIS, G. [1997]: Growth and Development from an Evolutionary
Perspective, Oxford.
FINDLAY, R. [1984]: Growth and Development in Trade Models. In: Jones,
R.W./Kenen, P.B. (Hrsg.): Handbook of International Economics, Bd. 1, Amsterdam
u.a., S. 185-236.
GUPTA, M. R. [1997]: Informal Sector and Informal Capital Market in a Small Open
Less-Developed Economy. In: Journal of Development Economics, Bd. 52, S. 409-428.
HARRIS, J. R./TODARO, M. P. [1970]: Migration, Unemployment and Development: A
Two Sector Analysis, In: American Economic Review, Bd. 60, S. 126-142.
HIGGINS, B. [1956]: The ‘Dualistic Theory’ of Underdeveloped Areas. In: Economic
Development and Cultural Change, Bd. IV (2), S. 99-115.
JÁNOSSY, F. [1979]: Wie die Akkumulationslawine ins Rollen kam, Berlin 1979.
JORGENSON, D. W. [1961]: The Development of a Dual Economy, In: Economic
Journal, Bd. 71, S. 309-334.
JORGENSON, D. W. [1967]: Surplus Agricultural Labour and the Development of a Dual
Economy. In: Oxford Economic Papers, Bd. 19, S. 288-312.
KANBUR, S.M.R./MCINTOSH, J. [1987]: Dual Economy Models: Retrospect and
Prospect. In: Bulletin of Economic Research, Bd. 40, S. 83-113.
LEWIS, A. [1954]: Economic Development with Unlimited Supplies of Labour. In: The
Manchester School, S. 139-191.
MEIER, G. M. [1995]: Leading Issues in Economic Development, New York, Oxford.
RANIS, G. [1988]: Analytics of Development: Dualism. In: Chenery, H./Srinivasan, T.N.
(Hrsg.): Handbook of Development Economics, Bd. I, Amsterdam u.a., S. 73-92.
ROSENZWEIG, M. R. [1988]: Labor Markets in Low-Income Countries. In: Chenery,
H./Srinivasan, T.N. (Hrsg.): Handbook of Development Economics, Bd. I, Amsterdam
u.a., S. 714-762.
SHINKAI, Y. [1960]: On the Equilibrium Growth of Capital and Labor. In: International
Economic Review, Bd. 1, S. 107-111.
SING. N. [1992]: Theories of Sharecropping. In: Bardhan, P. (Hrsg.): Theories of
Agricultural Institutions, Oxford.
TAYLOR, L. [1983]: Structuralist Macroeconomics, New York.
TODARO, M. P. [2000]: Economic Development, Harlow.
UZAWA, H. [1962]: On a Two-Sector Model of Economic Growth. In: Review of
Economic Studies, S. 40-47.
WORLD BANK [1998]: World Development Indicators, Washington D.C.
Part II:
Research on the Albanian Economy
Page
ARJETA ABAZI:
Albania and its Monetary Transmission Mechanism
27
DORIANA DERVISHI:
The Countries of Region and the Challenge of Economic Integration
35
ERMELINDA FEJZULLA:
A Review of the Controversies and Evaluation Approaches on the
International Monetary Fund’s Supported Programs
43
ARSENA GJIPALI:
Emigration and its Economic Consequences; the Transition Phase of Albania
63
ELIDA LIKO:
Exchange Rate Variability and Policy Implication
71
SUELA THIMO:
The Increase of Competition: an Important Factor for a Successful Transition
83
Arjeta Abazi
Albania and its Monetary Transmission Mechanism.
Introduction
In theory are mentioned different monetary transmission channels through which
monetary policy can affect economy. Let‘s try to understand if any of the theoretical
monetary transmission mechanism channels is the wright channel that permitted
Albania to achieve low inflation.
By the beginning of 1996 Albania was one of the countries of Eastern Europe that had
the lowest inflation, and after the crisis of 1997 and Kosovo crisis it achieved again low
inflation.
In the conditions of an undeveloped financial market, some monetary transmission
channels can‘t influence the economy. For example lending bank channel can‘t be
studied because in Albania during the period 1992-november 1999 BoA implemented
the accreditation of upper limited loans for secondary level banks. Knowing
these
conditions in this paper will be studied only two channels that can fit very well to the
Albanian economy. These are interest rate channel and exchange rate channel.[Bank
of Albania]’’1
1 Interest rate channel.
The interest rate is one of the instruments through which Bank of Albania (BoA) can
affect the economy and actually in Albania it fixes the interest rate through weekly or
daily auctions of repo (repurchasing public offers) that are repurchasing agreements
between BoA and secondary level banks for the treasury bonds. Three main effects
compose the interest rate channel: [Bank of Albania]’’2
1.1
1.2
1.3
Housing and other consumer expenditures effects.
Business investment effects.
Liquidity effects.
1.1
Housing and other consumer expenditures effects.
In other economies this effect is reported to be very important. Interest rates channel
affects housing and other consumers’ expenditures. What is going on in Albania?
Actually in Albania residential investments and consumer durable expenditures have a
real boom. Demographic movement, the desiree for a more commode life, the increase
of the individual incomes, are main factors that caused this situation.
In Albania banks don‘t credit households for buying houses or they apply a very high
interest rate. It is known that interest rate normally is the cost of buying a house. From
1992 when the interest rates were very high till 1996 when the interest rates decreased
gradually, residential investments grew up very quickly. During the period 1996-1997,
when pyramidal schemes were very strong we saw a very strange phenomena happening
1
2
Source: Economic Bulletin, Bank of Albania
Bank of Albania
28
Arjeta Abazi
in our country. A lot of people sold their houses and put their money in these schemes
that offered fantastic interest rates. During this period, Bank of Albania was quite cutted
out. Secondary level banks increased their interest rates till 32% but people didn‘t put
their money in the banks. The factors that influenced the action of the people were very
high interest rates offered by pyramidal schemes (60-100%), the absence of an
economic education of the people in general, political and social situation etc.
After the crisis of 1997 the demand for houses increased again and BoA followed a
constant and gradual policy of decreasing the interest rates. During 2000 residential
investments were still very high.
The above description of the situation is only a partial one because Albania has very
specific conditions. BoA, during the period 1992-november 1999 has implemented the
accreditation of upper limited loans for secondary level banks and in the period 1997november 1999 has forbidden to the state owned banks to credit the economy through
any kind of loan or mortgage. So, where did the Albanian found the money?
The biggest sources of this money are emigrants because they are nearly 20% of our
population. Their annually remittances are very high and this big amount of currency
that enter in Albania gives to the emigrants families the possibility to improve their
standard of life. Another sources of money are unknown incomes that come from
underground economy. This happens because many people that are registered as
unemployed in realty are employed and don‘t pay social insurance, which means that
they are part of the informal labour market.
As you can see the conclusion is that the effects of housing and other consumer
expenditures are irrelevant for the interest rate channel of the monetary transmission
mechanism.
1.2
Business investments effects
Businesses finance their investments through borrowing money from banks or other
financial institutions. Banks are the main source of funds especially for small and
medium size businesses, which compose 90% of Albanian businesses. As table 1 shows
the credit rate is very high. In the table we have annually maturity date credit rates given
in % and foreign direct investments given in million US dollars.
Table 1:
Credit rates and direct investments in Albania
YEAR
1993
1994
1995
1996
Credit rate (%)
30
20
21
28.8
Direct investments
58
52.9
70
90.1
Source: INSTAT (Institute of Statistics of Albania)
1997
43
47.5
1998
25
45
1999
25.8
41.2
2000
23.7
143
Foreign direct investments increased in the period 1994-1996 and then decreased during
the period 1997-1999. By the end of 2000 foreign direct investments increased
immediately due to the privatisation of part of the public sector. There are no data for
private domestic investments, which are related with the domestic credit rate that is
given in table 1. Foreign direct investments have no connection with the Albanian credit
rate.
As a conclusion we may say that in Albania business investment effects on GDP and
inflation can‘t be measured because there are no data for private domestic investments.
Albania and its monetary transmission mechanism
1.3
29
Liquidity effects
These effects are connected with the creation of household’s portfolio. In Albania cash
money is the main financial asset that compose households portfolio and only few of the
households are affected from actions that have to do with liquidity. For example: When
inflation increases households should maintain fewer assets that can be affected from
inflation and should maintain more assets like: land, durable items (automobiles or
houses). So in Albania there are no conditions to create a portfolio like theory says
because:
•
Albania still doesn‘t have private financial assets that are assets issued from
private enterprises with the aim to finance their investments.
•
Treasury bonds issued to finance the budget deficit are the only financial assets
and Savings Bank, which is the biggest bank in Albania (still state owned) is a
monopoly in the treasury bonds market because it purchases quite 70% of this
assets in the auctions organised by Bank of Albania.
•
Secondary market isn‘t developed. To purchase and sell treasury bonds people
have to go to any of the secondary level banks and to ask how to do it. This is
an additive cost because of the non-availability of the information that has to do
with the treasury bonds.
•
After the bad experience of 1996-1997, many people have lost their trust on
banks and other financial institutions.
•
Only cash composes portfolio of the major part of the population.
Interest rate channel effects in the monetary transmission mechanism aren‘t very clear.
To study this effects completely is needed to be fulfilled some conditions like:
•
The widespread of secondary level banks in all the territory of Albania. This will
encourage the further increase of the transactions.
•
Creation and development of other financial institutions.
•
The development of stock exchange market.
•
The increase of the amount of information related to the banking system. This
must be done because many people are unclear or don‘t have information at all
about the way they can put their money in banks.
So liquidity effects are quite inexistent because in Albania don‘t exist the conditions
that can permit to households the creation of a portfolio with different financial assets.
2 Exchange rate channel.
In Albania exchange rate channel is very important in determining the inflation because
it has both a direct explicit effect on CPI (the big amount of goods imported) and
another strong implicit effect on CPI that is caused from the big amount of currency
used in everyday transactions. Judging from the structure of our economy, the exchange
30
Arjeta Abazi
rate affects short and long run inflation. One of the factors that make the exchange rate
so important is that banks prefer to credit the economy only in foreign currency. The
exchange rate influences both production (real exchange rate channel) and inflation
(import prices channel).
Most of businesses and households prefer to convert their savings of lek (Albanian
currency) in foreign currency. In this way they avoid the exchange rate risk. Knowing
this fact can be said that monetary policy has a very weak effect on both direct channels
of exchange rates (import prices channel and real exchange rate channel).
To forecast inflation in Albania is used exchange rates, monetary aggregates and
dummy variables.
Nominal exchange rate is more effective in influencing inflation and production
because:
Exchange rate affects import prices and it has a very strong effect because Albanian
imports are 30% of GDP. This fact shows that exchange rate affects directly CPI
(Consumer Prices Index) and affecting CPI it influences inflation directly.
Deutchmark (when it was used) and US dollars are broadly used from the
population for savings and transactions. So the exchange rate lek/US dollar and
lek/DEM have an important effect on economy.
AD is affected from emigrants’ remittances. So the overvaluations and
undervaluations of LEK affect consumer expenditures.
A previous study (T.Kola, H.Mytkolli, and A.Mançellari) has concluded that:
⇒ Between inflation and exchange rates exists a very strong trade off.
A model that represents this trade off is:
INF=A1e(A2+A3DNER)NER(-1)
And the empirical estimation is:
INF=2.76e(1.15+1.08DNER) NER (-1)
where:
DNER is a dummy variable; NER is the exchange rate lek/US dollar.
DNER is 1 when the exchange rate increases and 0 when the exchange rate decreases.
In this manner it makes clear the effects of unexpected economic shocks on inflation.
So, when the exchange rate increases the reaction rate of the inflation is:
1.15+1.08=2.23 and when the exchange rate decreases the reaction rate is:
1.15+1.08*0=1.15
⇒ Changes in the general level of prices are predicted from changes in exchange rate.
⇒ The relationship between the variables is unilateral.
This study is made to show that in Albania exist a strong relationship between inflation
and exchange rate. So, the exchange rate is one of the main factors that can be taken in
consideration when we need to predict inflation.
Albania and its monetary transmission mechanism
31
Hadëri et al made another very interesting study in this field. They made an econometric
analysis through which examined the interrelationships among remittances, money
supply growth, the exchange rate (lek/US dollar) and inflation. Inflation is the depended
variable and the other variables are explanatory variables. They tried to include even
dummy variables but it turned out that these variables were irrelevant in explaining the
ongoing of inflation in Albania. One of the conclusions of this study is that exchange
rate is one of the main determinants of inflation and this is due to the features of
Albanian economy, which include emigrants’ remittances and high imports.
On my opinion this study is a good one because it include the main factors that
influence the ongoing of inflation in Albania (for further details contact the authors).
To examine inflation is considered lek/US dollar exchange rate and this is due to the
huge dollarisation of economy. Even in this paper will be taken under consideration the
exchange rate lek/US dollar.
Two channels through which the exchange rate affects short and long run inflation are
real exchange rate channel and import prices channel.
2.1
Real exchange rate channel.
This channel shows how production (GDP) is affected from a change in exchange rate.
In Albania, for the major part of the transition period, production activity was quite
completely stopped. From 1997 and on as a result of the general stabilisation of
Albania, we have had some big investments from different firms like AM Group,
VODAFONE. Also the privatisation of the public sector is on a good way. This is
shown from the successful privatisation of: AMC (Albanian Mobile Communications),
National Commercial Bank etc. Exactly here we see the effect of the real exchange rate.
Theory says that:
P
R = e US
where:
PALB
PUS are US prices, PALB are Albanian prices; R – is real exchange rate, e- is nominal
exchange rate
Generally in Albania we have had an undervaluation of Lek. Table 2 shows this:
Table 2:
The tendency of exchange rate (lek/dollar)
Year
1992 1993
Exchange
75.02 102.06
rate
Source: Bank of Albania
1994
94.68
1995
92.79
1996
104.5
1997
148.03
1998
150.64
1999
137.69
2000
143.71
2001
143.48
Exchange rate is very sensible to the economy shocks. So before the `90-s it was
7lek/dollar and during 1992 when Albania was moving to market economy it became
75.03lek/dollar. After the crisis of 1997, lek was undervalued immediately and the
exchange rate was 148.03 lek. During Kosovo crisis lek was overvalued and the
exchange rate was 137.69 lek/US dollar. This happened because there was a surplus of
US dollar supply that resulted from the big amount of foreign currency that came in
Albania from Kosovars and different humanity international organisations, which
helped our country to pass through this crisis successfully.
In Albania the major part of the transactions is made in US dollars and this fact shows
us that transactions are sensible on changes in exchange rates. In theory Central Bank
affects the exchange rate by changing the domestic interest rate. In Albania knowing
32
Arjeta Abazi
that the financial system isn‘t developed well, this kind of operation isn‘t effective.
When is needed to affect the exchange rate BoA has to interfere directly to the foreign
currency market.
So if domestic interest rate (for the deposits) increases, deposits in lek will get more
preferred. The demand for lek will increase and lek will overvaluate. Investment costs
will increase and the investors will postpone their investments for the future. This will
lead in a decrease of AD, production (GDP) and an increase of unemployment.
The increase of exchange rates and inflation are accompanied with the growth of
interest rates and as a result with the slowing down of the investments, especially longrun investments and those related with the production activity.
2.2
Import prices channel
Albanian economy is depended from imports because 60% of the consumption goods
are imported goods. As we see from the table imports are much bigger than exports.
Table 3:
Exports and imports in Albania (million dollars)
Year
1993
1994
Imports
601.6
601
Exports
111.7
141.3
Source: Ministry of Finance
1995
679.8
204.8
1996
922
243.7
1997
693.5
158.6
1998
812
208
1999
938
275
2000
1022
330
This means that Albanian economy becomes very sensitive on changes of imported
goods prices. So the increase of the import prices affects our economy through the
increase in the general price level. This is called the imported inflation and a very
important factor that causes it is the change in exchange rates.
In Albania we have flexible exchange rates. When lek is undervalued so exchange rate
(lek/dollar) increases, Albanian goods became cheaper and exports increase. But at the
other side imports became dearer. So the imported inflation increases. But when the
exchange rate is overvalued then we have a decrease of the imported inflation. Is proved
from previous studies (Bank of Albania) that between exchange rates and imports
exists a very strong trade-off.
Another factor that affects inflation are the speculations made by shopkeepers because
even a small and unimportant shock of the economy causes the increase of prices of
good that have nothing to do with import. The exchange rate is not strongly affected by
the interest rate but it‘s affected by some other factors such as the geo-political situation
in the region, power crisis, and the unexpected shocks of the economy.
When the exchange rate changes from these factors it by its turn affects inflation. For
example the oil shock on December 2000 led in an increase of oil prices and an increase
of inflation.
As a conclusion it can be said that import prices channel, knowing the features of the
Albanian economy, is an important channel of the Albanian monetary transmission
mechanism.
Albania and its monetary transmission mechanism
33
Conclusions
Monetary policy actions can be transmitted at the economy through the different
channels of the monetary transmission mechanism.
From the two channels studied in this paper the most important is the exchange rate
channel. Its importance derives from the features of the Albanian economy. Albania is a
country that depends on imports. Also 20% of its population are emigrants and their
annually remittances are brought in the country in foreign currencies.
Also banking sector prefers to credit the economy only in foreign currencies because in
this way it avoids the exchange rate risk.
This paper has just described how the theoretical monetary transmission channels work
in Albania and I think that it is only the beginning because this field is a large one and a
lot of other studies can be done. These studies may be done to test the effectiveness of
the monetary policy instruments and to try finding a trade off between inflation and
other variables that may influence inflation through a clear monetary transmission
channel.
34
Arjeta Abazi
Literature
1)
BERNAKE, BEN S.; BERTLER M. [1995]: Inside the black box: The Credit
Channel of Monetary Policy Transmission, Journal of Economic Perspectives,
Vol. 9.
2)
Economic Bulletin, Bank of Albania; Vol. 3, NR 4, December 2000.
3)
FREDERIC, MISHKIN [1995]: Symposium on the Monetary Transmission
Mechanism, The Journal of Economic Perspectives, Vol.9.
4)
HADERI, S.; HARSHOVA, A. [2001]: Instrumentet e politikes monetare ne
tranzicion, Ekonomia dhe Biznesi, Nr 4, Tirane.
5)
HADERI, S.; PAPAPANAGOS, H.; SANFEY,P.; TALKA, M. [1999]: Inflation
and stabilization in Albania, Journal of Post Communist Economies, NR 2.
6)
KOLA, T.; MANÇELLARI, A.; MYTKOLLI, H. [1999]: Kurset e kembimit dhe
tranzicioni ekonomik, Tirane.
7)
SHKELQIM, CANI [2001]: Raporti vjetor ne Parlament mbi zhvillimet
ekonomiko-financiare ne vend, Tirane.
Doriana Dervishi
The Countries of the Region and the Challenge of
Economic Integration
Introduction
The advantages of economic integration are widely emphasized by economic theory.
As one of the country of Balkan Peninsula, Albania accepts optimistically any
opportunity of economic integration and, in particular of region cooperation. In the
region, political “variables” are often inextricably entwined with economic ones, data
are often contradictory and the economic policies of the countries involved are not
homogenous. These difficulties are due to a series of social, historical and political
factors that are linked with the past and the present of the region, one of the most
complex in Europe. “Yesterday the ‘powder keg ‘of Europe, today a jigsaw puzzle of
small states which -except for Greece- as they emerge from half a century of being part
of the “socialist camp”, seem to rediscover the need to assert their national identities
through interethnic quarrels and archaic border claims”. [Castellan G., Histoire des
Balkans, Paris, Fayard, 1991]1
This political and social view of the region makes one accept the idea that the element
that can smooth the above obstacles is increase in economic cooperation. This
cooperation should initially lead to more intense trade exchanges among the countries in
the region.
The purpose of this paper is to argue some options for possible future cooperation in
region as a first step to the European integration process.
1. Regional integration
The regional integration is considered as the first phase of the overall integration
process.[Minxhozi, Muco: “Issue and opportunities for future economic cooperation in
Balkans”]2 Albania is committed to contribute by all means to the political, economic
and institutional regional cooperation. In this respect, we are convinced that this process
will soon create a new climate for economic relations among our countries for the
development of trade and investment, factors crucial to economic restructuring and
modernization.
The future of Albania relies on our membership to international political and economic
organization. The accession to the World Trade Organization reconfirms that Albania is
a serious country seeking integration in all pan-European and Euro-Atlantic structures.
It has agreed to assume its WTO obligations upon accession. We believe that, by
encouraging the trade links between countries, this membership can help foster greater
peace, stability and development in southeast Europe community.
Increasing trade relations with neighboring countries and the fulfillment of our further
trade liberalization and facilitation within the region will be realized through steps
1
2
Castellan G., Histoire des Balkans, Paris, Fayard, 1991.
See Minxhozi, Muco: “Issue and opportunities for future economic co-operation in the Balkans”.
36
Doriana Dervishi
within the Stabilization and Association Agreement process, which is the immediate
target of the Government.
It has prompted the launching by the international community of a major new initiative
the “Stability Pact for South-Eastern Europe”. This aims to support countries in southeastern Europe in their efforts to foster peace, democracy respect for human rights and
economic prosperity in order to achieve stability in the whole region.[Progress Report
of the Stability Pact 2001]3
The economic integration of the region, within itself and into the European and word
economies, is a central objective under the Pact. The EU appointed a Special
Coordinator for the Stability Pact. The Pact’s main organizational structure is the SouthEast European Regional Table, which meets periodically, bringing together
representatives of the participant countries. The Regional Table reviews progress in
implementing the Pact’s projects and initiatives and provides guidance for advancing its
objectives. The Regional Table ensures coordination among three working tables on
democracy, economic reconstruction and security.
In the context of the Pact, the EU has launched a Stability and Association Process. This
focuses on progressive integration into EU structures as a way of promoting regional
cooperation, security and development. Its main instrument will be “ Stability and
Association Agreements”. The process offers the eventual prospect of EU membership,
and may therefore improve the confidence of foreign investors in the stability of the
policy and administrative environment.
Details of the agreements remain sketchy partly because they are to be tailored to each
country’s initial conditions. Albania Croatia, FRY and FYR Macedonia are in principle
eligible. Condition for opening negotiations relate to democracy, rule of law, human
rights, economic reform, good neighbourly relations and compliance with the
Dayton Accord (for Croatia and FRY). It is likely that negotiations will begin first with
FRY Macedonia and Albania.
The first country to sign a SAA was FYR Macedonia in April 2001. Over the past two
years it has been one of the fastest reforming countries with significant progress being
made on privatisation, banking reform and institutional reform, including competition
lows.
Croatia and Albania are following closely in the SSA process. Croatia was already
relatively advanced in reform and therefore was able to move quickly in January 2000.
It signed the agreement in October 2001 and is well positioned compared with other
countries. Albania has made substantial gains in institutional strengthening since 1999
as shown by two peaceful nation-wide elections (local and parliamentary) in past two
years. It is now negotiating an SAA.
2. A comparative analysis of regional countries
In this analysis I have taken into consideration the following six countries that are part
of Balkan Peninsula. I consider important to analyse; Albania, Bulgaria, Croatia,FYR
Macedonia, Romania and Slovenia.
3
Progress Report of the Stability Pact 2001.
The Countries of the Region and the Challenge of Economic Integration
37
The aim of this factor analysis [Dumani “Natalite et development socio-economique en
Albani”,1995]4 consist in the possibility to find a relationship between variables, to
better understand the dimensions that variables take and finally the relation with the
development of the region.
For this reason, I have taken into consideration ten different economic variables from
different sector of economy like: agriculture, industry, trade, external sector,
governmental sector, employment and some important macroeconomic indicators.
The selection of these economic variables is done for some purposes
•
•
•
to study the level of development of these countries
to see if this development is concentrate only in one economic variable, in two
variables or more.
to asses the degree of similarity and the future possibility for co-operation with each
other.
Table 1 Figures for the year 2001 for each country
Country 1
2
3
4
Albania
1094
11.5
51
35.3
Bulgaria
1476
25.1
13.4
90.1
Croatia
4179
22.3
8.1
60.8
FYR
1686
21
9.5
98.9
Macedon
Romania 1644
27.6
11.4
61
Slovenia
9073
27.7
2.9
103.5
Source:EBRD Transition Report 2001
5
16.8
17.9
16.1
32.1
6
141
1000
827
169
7
27.5
86.4
57.2
46
8
146.7
148.3
125.7
99
9
31.4
44.5
47.3
37.8
10
0.1
9.9
6.2
9.2
10.5
7.2
1009
110
27
34.3
81.7
58.1
35.1
44.1
46
8.9
1-GDP per capita (US $); 2-Share of industry in GDP (in percent)
3-Share of agriculture in GDP (in percent); 4-Share of trade in GDP (in percent)
5-Unemployment (annual average); 6-Foreign direct investment, net
7-External debt/GDP (in percent);
8-External debt/exports of goods and services (in percent)
9-General government expenditure; 10-Inflation (annual average)
In Table 1 are presented the data for each country. There are analysed six countries and
10 variables. It is important to stress that analysing the table [IMF, “Albania”, in IMF
Economic Reviews, May-August 1999, EBRD, Transition Reports 2001, Human
Development Report 2000.]5 or different variables shown different classification of the
countries. For example the first variable, GDP per capita, Slovenia is in the first place
because has a high level of GDP per capita and Albania is the last because has a low
level.
From another variable for example inflation is Romania in the last place because has a
high value of inflation rate.
4
For a detailed explanation of the model see: Dumani ”Natalite et development socio-economique en
Albani”,1995.
5
Data are drawn from: IMF, “Albania”, in IMF Economic Reviews, May-August 1999, EBRD,
Transition Reports 2001, Human Development Report 2000.
Doriana Dervishi
38
And if I should continue with each variable, I could find different classification. But the
problems come if all variables are including in one, which is the classification of the
countries of region? This question finds answer in the next analysis.
First of all taking the results from analysis (table 2) is important to stress that
component one is more important than the others because it explain 41,3% of variance.
Component two explain 24% of variance. Component three 20% of variance and
component four 11.9% of variance. The four components together explain 97,5% of
cumulative variance.
Table 2.
Component
1
2
3
4
5
6
7
8
9
10
Total variance explained
Initial Eigenvalues
Extraction Sums of Squared Loadings
Total
% of
Cumulative
Total
% of
Cumulative
Variance
%
Variance
%
4,13022
41,3022
41,3022
4,13022
41,3022
41,3022
2,406112 24,06112 65,36332 2,406112 24,06112 65,36332
2,023696 20,23696 85,60028 2,023696 20,23696 85,60028
1,195516 11,95516 97,55544 1,195516 11,95516 97,55544
0,244456 2,444562
100
2,54E-16 2,54E-15
100
6,36E-17 6,36E-16
100
-1,5E-17
-1,5E-16
100
-1E-16
-1E-15
100
-2,9E-16
-2,9E-15
100
Extraction Method: Principal Component Analysis
This fact shows that 10 variables are dimensioned in four important components or I
can say that these countries have development in four components in which the first one
is more important because explain a great part of variance. In table 3 is shown the
component matrix and in the first component are included: Share of agriculture in GDP
(in percent), external debt/exports of goods and services (in percent), GDP per capita,
general government expenditure, share of industry in GDP (in per cent) and share of
trade in GDP (in percent). In the second component is included only external debt/GDP
(in percent). In the third component are included: foreign direct investment, net and
inflation and in the fourth component is included only unemployment.
Table 3. Component Matrix
Component
1
AGRIC
-0,94381
EX_D.EXP -0,68634
EXT_DEB
0,217968
T
FDI
0,253862
GDP_C
0,680646
GOV_EXP 0,706666
IND
0,947704
INFL
0,334352
TRADE
0,743164
UNEMPL
-0,36268
2
-0,15036
0,677576
0,958496
3
-0,00852
0,09883
0,003584
4
-0,21553
-0,23813
-0,0659
0,459569
-0,3481
0,541495
-0,00522
-0,36494
0,194569
0,457189
0,833926
-0,50513
-0,21823
0,291522
0,822777
-0,41589
-0,2841
-0,1559
-0,39862
-0,34507
0,077631
0,278993
0,405417
0,733151
Extraction Method: Principal Component Analysis.
The Countries of the Region and the Challenge of Economic Integration
39
This data are taken from table 3 based on the correlation coefficients between variables and
components.
From this short analyses, it show clearly that the economic variables are dispersed in different
components (exactly four) and show another time that the economic development of these
countries doesn’t consist in the same dimension or these countries are in different directions.
They are development in one sector, and less in the other one. And this means that they have
much to do to co-operate with each other and they have much to do in the difficult way of
European Union.
It is interesting to know the grouping of six countries that shown similar development. (table 4).
If they will be arranged in groups I distinguish four important one. In the fist group is Albania
and FYR Macedonia. In the second group is Bulgaria and Romania. In the third is Croatia and
in the fourth group is Slovenia, which is more developed than the other countries.
Table 4.
Average Linkage (Between Groups)
Cluster Membership
Case
4 Clusters 3 Clusters 2 Clusters
1:Albania
1
1
2:Bulgaria
2
1
3:Croatia
3
2
4:Fyrmaced
1
1
5:Romania
2
1
6:Slovenia
4
3
1
1
1
1
1
2
First of all it is important to stress that Albania have the possibility to co-operate with
FYR Macedonia because they are in the same group and have the same development.
And after that Albania has to think about another cooperation with other countries that
are more development than US.
I think this result is interesting and important because in reality Albania have concluded
a free trade agreement with Macedonia.[According the discussion with specialists in
Ministry of Economy ]6 and is working to conclude a free trade agreement with Croatia.
This step consists in a serious effort to open the market through a very constructive
way, considering it as one of the main elements of cooperation in the region and
integration with EU.
The last round of negotiations with Macedonian side, followed several steps and signing
three protocols between both sides, focused on the approval of the agreement on all
other issues except reduction on tariffs and rules of origin, which will be under
negotiations in the very near future. Related to the tariff systems of our countries, there
are some differences.
Albania, because of the WTO membership is represented with a very liberalized system,
while Macedonia is applying for the membership, and is undertaking steps to reduce
and liberalize its tariff system. We are trying to have approximately the same base, in
order to start further staging in time and tariffs rates.
Within this frame, preparing the next round of the negotiations, Ministry of Economic
Cooperation and Trade in collaboration with the Ministry of Finance and other line
Ministries, are currently studying to estimate the budget implications as a result of the
6
According the discussions with specialists in Ministry of Economy.
Doriana Dervishi
40
Free Trade Agreement ( FTA ), and also, to find out the ways of the compensation
related to the expected revenue lost due to such agreement, through
shifting from customs revenue to internal taxation revenue, as the main
source of the budget account,
strengthening and reform in the tax administration,
custom control,
intensification of the struggle against smuggling, increasing the capacity
of custom administrators etc.
Considering that civil society and private sector in particular, are important pillars to
implement successfully the strategies, we are intensifying the efforts in having
constructive relations between private and public sector. During the last year, with the
initiative of the Ministry of Economic Cooperation and Trade, it was established the
Consultative Council of Business headed by the Ministry of Economy, which is
composed by several representatives of the Business Community.
This structure set up a new area of the cooperation and is reviewing all legal and sublegal acts that are affecting the trade. The negotiation team on FTA is composed by the
representative of this community. In this respect, it is organized a national seminar on
understanding of the FTA and discussing the policies that have to be undertaking during
this phase, within national frame.
This agreement is actually approved by the Government and the Commissions of the
Parliament, and is ready to be ratified by the Parliament.
Within the process of further trade liberalization and facilitation and the custom
administrative assistance with neighboring countries, PRO Committee in Albania aims
to stimulate the cooperation of the Business Community, to be involved in such a
process, with countries of the region and with the border country.
Concluding Remarks
Economic integration in Europe is not an easy process. Moreover cooperation within
regions such as the Balkans is hindered by various restriction, due to the economic,
political and institutional differences between individual countries. Traditions and
historical events have also had an impact on the process. With the long-term aim
participation in the E.U, regional integration efforts try to smooth differences and create
the conditions for further economic growth in the region. Yet, this is strongly linked
with the implementation of economic reforms in individual countries. A crosscomparison of economic data indicates that there is some potential for integration in the
Balkan region, despite the obvious difficulties. Albania is strongly interested in
becoming integrated into EU as soon as possible, despite the awareness that the process
will take time. However, progress in the process of economic transition remains a
priority in the short-term and a necessary pre-condition for any integrative effort.
The Countries of the Region and the Challenge of Economic Integration
41
Literature
Castellan, G. [1991]: Histoire des Balkans, Paris, Fayard.
Dumani [1995] : ”Natalite et development socio-economique en Albani”, Academia
Hartman Brussel.
EBRD, Transition Reports 2001.
Human Development Report 2000.
IMF, “Albania”, in IMF Economic Reviews, May-August 1999
Minxhozi, L., Muco, M. [1998]:” Some opportunities for future economic co-operation
in the Balkan Region”. Longo editore Ravenna.
Progress Report of the Stability Pact 2001
Ermelinda Fejzulla
A Review of the Controversies and Evaluation
Approaches on the International Monetary Fund’s
Supported Programs.
1. Introduction
Albania started the reform, abandoning rigid adherence to central planning and
economic self-sufficiency, in 1991. It did so, however, in the throes of an economic
crisis, which is deeper than that facing virtually any other reforming socialist country.
It is clear that IMF recommendations and models have affected stabilisation and growth
policies in Albania. This is because, since 1992, the Albanian government has embarked
on some macroeconomic stabilisation and structural reform programmes supported by
the IMF.
Its presence is notable for other transition economies, also. (See, Table. No.1).
“There has been considerable controversy about the appropriateness of IMF adjustment
policies and facilities to the circumstances of the low-income countries and there is
evidence that its stand-by programmes in these countries were subject to high failure
rates. (Tony Killick, 1995, p. 603) ” On the other hand, the Fund continuously has
defended its position. The Fund's Annual Report of 1993 concluded that,
“[the ESAF Enhanced Structural Adjustment Facility (ESAF)] has
proved an effective mechanism for Fund involvement in low-income
countries...".
There is a vast literature on the theoretical aspects of the economic modelling
underpinning the Fund’s supported programs as well as evaluations of their effects in
countries which have applied them. This has resulted in a range of critiques of the
IMF’s philosophy and approach, which offers, also, the criteria for the evaluation of the
programs.
One strand of this critique is found in the literature evaluating these programmes in
developing countries. “Although there are substantial differences between the countries
of Eastern Europe and many of the less developed countries undertaking structural
adjustment, there are also lessons that the former can learn from the later. (Killick,
1991)”
Firstly, I present the controversies on the International Monetary Fund. Secondly, some
approaches to the evaluation of the programs are introduced. Finally, I present the
methodology that I am thinking to use in order to assess the appropriateness of the
IMF’s supported programmes in Albania and some evidence about the effects of these
programs in some transition economies.
2. Controversies on the International Monetary Fund.
For better understanding the criticism on the Fund’s supported programmes, it is useful
a short description of the most important economic and political factors, which led to
the Fund’s establishment, as well as, to the deviation of the Fund’s role from that it was
originally set up for.
As World War II raged across Europe and Asia, the leaders of England and the United
States realised that, they would need multilateral institutions in order to improve the
international chaos of the 1930s, experienced with high unemployment, hyperinflation,
recession and fluctuating exchange rates, and to ensure a liberal, capitalist world
economy after the war. The two men, who drafted the foundations for these
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international institutions, are Harry Dexter White (member of the US Treasury until
1946, the time he took up the post of the US Executive Director of the Fund) and John
Manyard Keynes (Honorary Advisor to the British Treasury in the period 1940 until his
death on April, 1946).
The formal negotiations, in Bretton Woods, New Hampshire, USA, July 1944, resulted
in what became known as the Bretton Woods Institutions, or the International Financial
Institutions, with the International Monetary Fund (IMF) among them.
In general, “the International Monetary Fund was established in order to encourage
international co-operation to cope with recession and protectionism on a world scale
and to discourage individual countries from pursuing policies that would beggar their
neighbours and eventually themselves” (Bird 1985). It provided short-term assistance to
countries whose currencies were pegged to gold or the US dollar in case they found
themselves running short of foreign exchange. In turn, the borrowing country would
undertake to pursue policies that were expected to restore its reserves and confidence.
Article 1 of the Articles of Agreement (Articles of Agreement of the IMF) states the
Fund’s purposes and policy conditions to its loans.
1. To promote international monetary co-operation through a permanent
institution which provides the machinery for consultation and collaboration
on international monetary problems
2. To facilitate the expansion and balanced growth of the international trade,
and to contribute thereby to the promotion and the maintenance of high level
of employment and real income and to the development of the productive
resources of all members as primary objectives of economic policy.
3. To promote exchange stability, to maintain orderly exchange arrangements
among members, and to avoid competitive exchange depreciation.
4. To assist in the establishment of a multilateral system of payments in
respect of current transactions between members and in the elimination of
foreign exchange restrictions which hamper the growth of world trade.
5. To give confidence to members by making the general sources of the Fund
temporary available to them under adequate safeguards, thus providing them
with the opportunity to correct maladjustments in their balance of payments
without resorting to measures destructive of national or their international
prosperity.
6. In accordance with the above, to shorten the duration and lessen the degree
of disequlibrium in the international balance of payments of members.
The Fund shall be guided in all its policies and decisions by the purpose set
forth in this article.
“Throughout the 1950s and 1960s there were no many questions asked about the
legitimacy of what the Fund was doing. At least superficially, the Fund appeared to be
successful in achieving the objectives it has been set. (Bird 1995)”.
The circumstances in 1970s affected the Fund activities in two ways. On one hand, in
September 1971, all the world’s currencies were floated and the Bretton Wood system
broken down. Many doubted the rationale for the IMF, finding it with little or no
A Review of the Controversies and Evaluation Approaches
on the IMF’s Supported Programmes
45
systemic role, as the Fund’s charge was the monitoring of this system. On the other
hand, the Third World countries experienced a deep indebtedness, caused mostly by the
two oil shocks associated with recession among industrial countries and unfavourable
national policies associated with corruption and mismanagement. This shifted the focus
of the Fund’s conditions to its financing sharply towards adjustment in the borrowing
country. “In an attempt to deal with the deepening crisis of the budget deficits, falling
revenues, chronic balance-of-payments problems, gradual decay of infrastructures as
well as social welfare facilities, many of these countries experimented IMF and World
Bank structural adjustment programmes. (Mohan et al. 2000)” During the 1970s the
IMF had continued to make a few relatively large loans to a limited number of industrial
countries (Italy and United Kingdom), but beyond the mid-1970s industrial countries
ceased to draw any resources from it.
The last decade, a new group of countries were added to the borrowers list of the Fund East European and former Soviet Union countries - in their transition to market
economies.
Recently, some of the more advanced developing countries like Indonesia, South Korea
and Thailand, in 1997/98, Brazil in 1998, experienced deep financial crises while
attempting to liberalise their economies toward globalisation. “These crises have
resulted in demands on the IMF and World Bank for financial assistance for purposes
other than those for which their assistance was originally designed. (Mikesell, 2000)”
Critiques on the Fund.
Economic, political, and social changes in the world have brought, also, changes in the
environment the IMF operates. They have, also, contributed in the controversies
surrounding the IMF’s policies. Below, I will present some of the most discussed
controversies, focusing especially on the critiques to the role of IMF in developing
countries.
As Nowzad (1981) notes, in the period 1970-1980, the main charges which stemmed
from developed countries were directed to the Fund’s tendency to behave like a
development finance agency, and that consequently failing to fulfil its proper role as the
centre of the world monetary system. In this context, the loss of its systemic role, after
the Bretton Woods system broke down, was seen as sufficient reason to close it down.
Another contested feature was the Fund intrusiveness on the borrower country
sovereignty, by overextending its policy conditions or by lending to countries that could
perfectly well borrow from the commercial banks instead (Mohan et al, 2000).
Schwartz (1998), agrees with the Fund that balance of payments problems of
underdeveloped or developing countries have structural roots, but suggests that the
Fund should refrain from dealing with them, reducing the scope of intervention. The
Meltzer Report and the U.S. Treasury Report sustain this also, both sharing the idea that
the expansion of the IMF intervention with long-term structural reform programs have
not worked as expected. The principal source of this inefficiency, is seen the supposed
‘moral hazard’ associated with the Fund’s lending. To put it simply, the borrower
country wont be determined to pursue thoroughly the right measures to their balance of
payments problem, as they are attracted by the possibility of having finance from the
Fund at subsidised and concessionaire rates.
From the other side, analysts of the programs in developing countries have argued that
the Fund was behaving as an inappropriate development agency and that its supported
policies did more harms than good, particularly to the poorest of them.
As Williamson (1983) notes, the traditional criticisms where that the Fund adopts a
doctrinaire monetarist approach which is insensitive to the individual situations of
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borrowing countries; imposes onerous conditions; is ideologically biased in favour of
free markets and against socialism and that it overrides national sovereignty and
perpetuates dependency.
These points are briefly elaborated below.
The Fund employs a ‘monetarist’ framework for economic analysis. This general
‘philosophy’ has been the subject of much disapproval. As Nowzad (1981) points out,
the approach of the institution to its members, it analytic approach to economic
problems, its assumptions regarding causative factors, and its modus operandi are
subject of debate too, as they are directly affected by the Fund’s philosophy.
The critics argue that the monetary framework yields uniform and rigid conclusions
regarding the content and timing of programs and therefore a “standard package”
incorporating elements that it applies to all countries in all circumstances.
This inflexibility is illustrated with the Fund’s balance-of-payments policies. The Fund
often fails to distinguish between exogenously and endogenously caused balance-ofpayments problems. “By applying, in a dogmatic way, the monetary approach to
balance-of-payments problem, the Fund treats it as mainly caused by “expansionary
financial policies mainly associated with large budgetary deficits and /or from a
complex of cost-push factors and expectations. (Dale, 1983)”. This in turn leads to a
wrong medicine prescription for the problem and to a fierce conditionality for its
financing, as the Fund will require the borrowing government to undertake measures
even if the causes are actually external and beyond its means.
At this point it is useful to refer to “structuralist” critique on the Fund response to the
balance-of-payments problem. Taking into account certain structural characteristics of
the developing countries, they assess, that balance-of payments problems in the Third
World often arise from the characteristics of the development process itself. They cal it
a “development deficit”, which is not primarily the result of countries “misbehaving”,
but it is aggravated mainly by external factors. “If this is the case, ‘developing countries
should not be “punished” for deficits with monetary contraction and other measures
embodied in Fund programs (Pastor, 1987)”, rather “an enlarged flow of international
assistance is the more appropriate policy response, i.e. finance rather than adjustment
(Killick et al, 1992)”.
Fund programmes, thus, are seen as neglecting the supply side causes of payments
difficulties and economic growth prospects.
Stiglitz, 2001, gives an example of the Fund’s ‘a one-size-fits-all approach’ and
intellectual incoherence displayed throughout the management of the Asian financial
crisis. He argues that, although the Fund recognised the key factor of the crisis to be
financial institutions, its stuff continued to use outdated macromodels that did an
inadequate job of incorporating the financial sector. He further stress the fact that the
Fund did not consider the widespread discussion in the USA of how the failure of much
more sophisticated models used by the US Federal Reserve had led to inadequate policy
responses.
De Carvalho et al, 2001, assessing the strategy of the Fund in the recent Asian crisis,
comes out with the same argument as Stiglitz. He notes that, ‘the Fund did recognise the
structural specifics of Asian economies, nevertheless, the short term adjustment policies
the fund recommended were, somewhat surprisingly, identical to those proposed to
conventional cases of excess demand imbalances’.
The above argument supports another critique stating that the conditionality attached to
the programs undermines program ownership. The IMF is criticised for not considering
A Review of the Controversies and Evaluation Approaches
on the IMF’s Supported Programmes
47
that the authorities of the borrowing country are much more informed about social and
political priorities of their country. The conditionality often imposed, so wide ranging
and with micro-managed structural policy recommendations, is perceived costly by the
developing countries, therefore many of them try to avoid borrowing from the Fund
during crisis. They are reluctant, partly because they fear that the acceptance of such
conditions will undermine the political base of the government and drive it from office.
Therefore, current methods of conditionality, urging greater selectivity in support of
locally initiated or “owned” programs are suggested.
The Fund policy conditions are seen as “harsh”, detailed, lacking a clear economic
rationale, and frequently self-defeating. These could be some of the reasons for the
evaluation of the IMF’s programs as unwidely, highly conflictive, time consuming to
negotiate, and often ineffectual.
The Fund’s approach is characterised as market fundamentalism, which implies firstly,
a weakened labour power and secondly, removal of the state from the key sectors of the
economy.
Anderson, 2001, argues that the so-called “labour market flexibility”, promoted by both
IMF and WB, makes it easier to fire workers or to undermine the ability of unions to
represent their members. Analysing the financial crisis in the mid-1997, it is pointed out
that although reckless international investors and domestic banks caused the crises, the
costs were borne by the workers.
The state is seen as inefficient in resource allocation. But, as Stiglitz, 2001, points out,
‘the arguments concerning governmental inefficiency and incompetence hold equal or
stronger force at the international level than they do at the national level...the IMF’s
economists would expect an international governmental body such as itself to be a
market failure.’ Polanyi ,1960, underlines the ironic side of Fund’s approach to posits
the ‘freedom’ of markets and the limited use of state power by massive amounts of
political interference (structural adjustment programmes. Mohan, 2000”
The Fund is sometime seen as an institution that serves to impose the vision of the
world held by its more influential members on its other members, and/or as a device by
which the rich countries increase their power over the poor. The key elements that help
in this are its rigid approach together with its doctrinaire philosophical underpinnings.
Often the Fund appears to be a bill collector for lending nations. It ensures that the
borrowing countries will be in able to repay the loans by keeping a overvalued
exchange rate, in order to achieve a massive trade surplus as quickly as possible and
regardless of the costs.
As can be noticed, a great emphasise is put on the effects of Fund-supported programs
in the economic development of the borrower country. Many of the arguments offer a
growth-oriented critique. The growth oriented critique; contends that Fund-supported
stabilisation programs have short-run recessionary impacts, damaging the prospects for
long-run growth and poverty reduction because the policies adopted in a short-term
stabilisation program, aim primarily the restoration of the balance of payments viability
and stabilisation and therefore are too much deflationary.
The evidence brought in support to this critique is the fact that most of the growth rates,
of the countries that have been under IMF supported programmes, were negative. The
Fund counter argument, as showed by Guitan, 1980, is that its programs build the bases
for sound and sustained economic growth rates, by improving the BoP and bringing the
inflationary pressures under control.
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Pastor, 1987, argues against growth-oriented critique and recast the criticism of the
Fund in terms of class and income distribution. Mikesell, 2000 makes this point also
when analysing the Asian crises. He recognises that the Fund loan conditions do not
proposed ‘priority actions’ aiming the protection of the poor during financial crises.
Another sort of critique has to do with the existence of two institutions, IMF and World
Bank (WB), making the same kinds of loans to the same countries i.e., the long-term
facility for poverty reduction and growth (PRGF). This overlap of their activities has led
to the suggestion that the WB functions should be taken over by the IMF.
The arguments showed above and others have lead to a wide debate for reforms on the
international financial architecture, including the IMF.
3. Alternative approaches to estimate the effects of Fund-supported programs.
The approaches to measure the effects of the Fund-supported programs suggested in the
literature and elaborated by Haque et al (1998) and Killick et al (1992) are presented
below.
1. The before-after approach. It compares the macroeconomic performance under the
program (or after it has been initiated) and performance prior to the program. Although
it is easy to calculate, the approach carries important problems, too. The estimation of
program effects will typically be biased and unsystematic over time. They will be
biased because this approach incorrectly attributes all of the change in outcomes
between the pre-program and program periods to program factors. They will also vary
over time, because the estimated program effects for a given year will be dominated by
specific non-program influences of that year.
This approach is a poor estimator of the ideal counterfactual, since it assumes a
counterfactual in which policies and the external environment would have remained
constant at their pre-program values.
2. The with-without approach. It is designed to overcome the inability of the beforeafter approach to distinguish between program and non-programs determinants of
macroeconomic outcomes. Firstly a control-group is determined, with non-program
countries that are subject to the same non-program determinants as the program
countries. Then, before-after changes in macroeconomic outcomes are compared.
The effects of external factors will cancel out leaving the difference between the groups
performance to reflect only the effects of Fund-supported programs.
The problem with this approach is that program countries do differ systematically from
non-program countries prior to the start of the program. This because, program
countries are not randomly selected - the country seeking for the Fund financial support
has a balance of payments need. Therefore, the estimates from this approach will be
biased.
3. The generalised evaluation estimator. This approach is a with-without approach
modified in two ways. Firstly, it accepts the non-random selection of program countries,
identifies the specific differences between program and non-program countries in the
pre-program period, and then controls for this differences while comparing economic
performances. Secondly, it attempts to capture the effects of policy and other variables
A Review of the Controversies and Evaluation Approaches
on the IMF’s Supported Programmes
49
on the macroeconomic outcomes, taking into account how policies would have evolved
in the absence of a program.
For the best estimates with this approach, the initial conditions and a range of empirical
relationships have to be determined and a substantial amount of data to be provided.
Its estimates are likely to be less biased then those of the first two approaches.
4. The comparison of simulations approach. It does not determine program effects from
actual macroeconomic outcomes in program countries. It relies in simulations of
econometric models to infer the hypothetical performance of policies included in a
Fund-supported program and an alternative policy package. The problem with this
approach is its need for an econometric model that incorporates the relations between
various policies and certain important macroeconomic variables, which remains yet
unresolved.
These approaches are used in many empirical studies examining the programmes’
effects on a range of economic indicators. Pastor, 1987, applying the before after
approach, in a sample of 18 countries, finds a positive effect of the program in the
balance of payments, but no effect on current account. He also argues against the
growth-oriented critique and recasts the criticism in terms of class and income
distribution. Killick, 1995, uses the before after approach for a sample of 16 countries.
He essentially comes out with the findings of IMF staff (such as the paper by Schadler
et al, 1995) regarding improvements in the external situation of the borrowing country
but is sceptical that IMF programs have much effect on policies, except with respect to
exchange rate. Generally, the empirical evidence shows that the programs do not
significantly influence indicators like growth and inflation.
Goldstein et al (1986) find negative effect of the programs in the balance of payments
and current account, while Khan (1990) using the same method of generalised
evaluation shows a positive relationship even though significant only at 5%.
From the discussion above it is clear that the evidence and the conclusions are mixed
living room for further studies on this matter.
4. My Approach to Program Evaluation.
In order to play the role of policy adviser for the borrowing country, along with its
financing role, the Fund must have a robust understanding of issues concerning the
balance of payments problems. These issues comprise the identification of the formal
relationships between the balance of payments, money, prices and growth. Therefore
the use of macroeconomic and econometric model becomes an integrated point of the
design of the Fund-supported programs, as they define the appropriate policy
instruments consistent with the achievement of specific objectives of the program.
The Fund financial programming, known also as the IMF’s approach to economic
stabilisation, is based to a large extent on the models developed in the Fund, at the end
of the 1950s, particularly, the studies by J. J. Polak and E. Walter. Robichek.
As Polak, 1997, puts it, the model appears “to be still very much alive 30 or 40 years
later”, as many studies from the IMF staff are devoted to this model and its policy
implications1
1
The documents referred by Polak (1997) are the IMF Occasional Paper No. 50, attributed to eight seinor
staff members of th research Department and entitled Theoretical Aspects of the Design of FundSupported Programs, 1987, and a workbook prepared as a training manual in the Fund’s Institute:
Financial Programming and Policy: The Case of Sri Lanka , 1996.
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Killick, 1995, points out a critique often made on this monetary model. It is suggested
that the assumptions about the effectiveness of monetary policy implicit in the Fund
financial programming model are questionable in the conditions of low-income
countries.
Below we will introduce the monetary model and distinguish the hypothesis to be
tested. The test of this hypothesis, referring to Albania and possibly panel data from
some transition economies, will be the focus of the forthcoming work.
The model was designed to study the effects on both income formation and the balance
of payments of the two most important variables: autonomous changes in exports and
the creation of bank credit, which then could be used for policy purposes.
The model contains two behavioural and three definitional equations:
1. ∆MO = k ∆Y
2. M = m Y
3. ∆MO ≡ ∆Md
4. ∆MO ≡ ∆R + ∆D, which is transformed as follows:
∆R≡ ∆MO - ∆D ≡ ∆Md - ∆D ≡ f(∆y, ∆P, ...) - ∆D
by explicitly including other elements of the absorption approach and the monetary
approach to the balance of payments, such as income and expenditure relationships and
the role of private capital movements, it can be further transformed as: Y - A + ∆K =
∆M - ∆D.
It tells that absorption will exceed the sum of the supply of domestic income and foreign
savings when the change in domestic credit exceeds the change in the money stock.
5. ∆R ≡ X - M + K
where,
MO = money supply
Md = money demand
Y = nominal GDP
M = imports
R = reserves
D = domestic credit
X = exports
K = net capital inflow of the nonbanking system
k = the inverse of the velocity of circulation of money
m = the marginal propensity to import
∆y = change in real income
∆P = change in domestic price level
The endogenous variables are ∆R and Y. MO also enters the model endogenously as
implied from the monetary approach to the balance of payments when exchange rate is
fixed.
The exogenous variables are X, K and ∆D.
A Review of the Controversies and Evaluation Approaches
on the IMF’s Supported Programmes
51
Explicit Assumptions on the Model:
1. constant income velocity of money2
2. fixed exchange rate 3
3. Md is a function of a few variables, such as the real income, prices, interest rates and
so forth.
4. The variables entering the function of the demand for money are independent of the
changes in domestic credit.
The Financial Programming Framework has undergone some modifications, adapting to
the changing circumstances in the world economy, which we will briefly introduce
below.
The first extension is made in order to take account of the balance of payments so as to
specify from what direction the improvement in the balance of payments is coming - via
current or capital account, and within current account, via reductions in imports or
increase in exports. This is done by adding the behavioural relationship (already showed
in the model) of the demand for imports.
The second extension is to link the monetary expansion with the fiscal position of the
government. This is done by; (*) discriminating between the expansion of credit to the
private sector and that to the public sector and by (*) taking into account the
connections between the government budgetary position and official borrowing o the
one hand and the growth of domestic credit on the other hand.
In response to the critiques that the programs have adverse effects in the growth the
borrowing country, the Fund is increasingly including growth as well as stabilisation as
objectives of its programs. But, as Wood, 1997, notes, “the growth objective still
remains a secondary objective and program design is not constraint by minimum growth
rates”. The most recent and ambitious effort to include medium term growth as an
objective of the adjustment program, is the work from Khan and Montiel, 1989. The
two building blocks of the model are the monetary approach to the balance of payments
and a variant of the open-economy neo-classical growth model (Harrod and Domar
growth models of 1940s), that is still used in the World Bank. The integrated model was
expected to be a tool in analysing adjustment with growth in developing countries
(linking growth, inflation and balance of payments with government policies and
availability of foreign financing), but this desired characteristic of the model is rejected
on theoretical aspects as well as on evidence bases. Polak, (1997), assesses that attempts
to marry the monetary model of IMF to medium-term growth models have foundered on
fundamental incompatibility with these two types of models.
2
It has been found useful to concentrate on the balance sheet of the central bank and its credit activities
rather than on consolidation of the balance sheets of the monetary system as a whole. Therefore the
definition: ∆H = ∆R + ∆DCB and the behavioural equation ∆MO = q∆H are introduced.
H is reserve money (currency plus reserves of commercial banks), DBC is domestic credit of the central
bank and q is the money multiplier.
3
The model allows for flexible exchange rate by introducing the exchange rate variable in the
behavioural equation of the demand for imports.
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Ermelinda Fejzulla
How the Model is Applied for Financial Programming and What About the Assumptions
- do they hold?
The relationship which is used for policy purposes in the financial programming is
showed in equation (4), which tell that a ceiling on the change of domestic credit
determines the change in the net foreign assets.
Firstly, a target for changes in foreign net assets is set. Then, an estimate of the probable
course of the demand for money over the same period is made. This involves projecting,
or setting targets for, the principal determinants of money demand, such as income and
prices4, or an assumption on income and velocity of money behaviour, if the simple
velocity function is utilised. The last step, given a forecast of the demand for money and
a target for the balance of payments, is the derivation of the figure for the needed
change in net domestic credit from the balance sheet of the banking system.
Equation (4) remains the analytic core of the Fund programmes and it is the relation.
This is most evidently in the modest change of the content of stand-by programmes, and
essentially the same calculations, the same resulting domestic credit performance
criteria, or ‘benchmarks’5, remaining at the core of even the less short-term and more
supply side Extended Fund Facility and Enhanced Structural Adjustment Facility
programmes.
Following equation (4), in order for the policy instrument (change in domestic credit) to
have a predictable effect on the target (balance of payments), the money demand must
be a predictable relationship to a limit set of variables. The demand for money,
therefore becomes a critical relationship in the analysis. Is its stability one of the
assumptions that I will test in order to assess the appropriateness of the Fund-supported
programs in Albania.
Another crucial and in the same time contested assumption of the model, that we also
test referring to Albanian economy, is that the variables entering the demand for money
function are not related to the changes in domestic credit. With other words, it is
assumed that changes in domestic credit result only in changes in reserves, therefore, an
expansionary open market operation by the monetary authorities must have no effect on
the domestic interest rates, spending decisions, prices, or exchange rate.
As noted in different studies, within the Fund and out of it, such an assumption will
clearly not apply to a large country with a floating exchange rate, nor to a developing
country with restricted capital inflows and undeveloped capital markets. As Killick,
1995, notes, that there is considerable doubt whether many developing countries
governments are in a position to exercise the degree of policy control over the change in
domestic credit that the financial programming model requires.
The scope of our further work will be to test the questionable assumptions about the
effectiveness of monetary policy implicit in the Fund financial programming model in
the conditions of low-income countries, with special reference to transition economies
and Albania.
4
One of the allowances that has to be made in the model, according to Polak, is that the domestic interest
rate, which does not even appear in the simple model, may be strongly affected by the size of the
government deficit and the way it is financed (from the banking system or in a nascent domestic capital
market).
5
Structural benchmarks are indicators which aim to delineate the expected path of reform for individual
structural policy measures.They are usually expressed qualitatively, as structural policies can not be
expressed in quantitative form.
A Review of the Controversies and Evaluation Approaches
on the IMF’s Supported Programmes
53
The Impact of the IMF-Supported Programs in Transition Economies.
As mentioned, one of the critiques on the IMF was that its programs often hamper
growth and do not achieve their own objectives such as external viability and low
inflation. We have already mentioned some of the evidence for the impact that
programs have on growth and seen that there are not clear cut conclusions. The same
applies to the tests regarding the effects of the programs in borrowing countries’
inflation. Pastor (1987) finds no effect. Killick, 1984, and Killick et al, 1995, find a
reduced inflation but the effect seems not much significant. Goldstein and Montiel,
1986, find an increasing inflation while Khan and Knight, 1985, find a significant
reduction in the indicator.
Below I try to give some more evidence on this matter. In the light of studies by
Havrylshyn et al, 1999, and Mercer-Blackman et al, 2000, we test for the effect of the
IMF supported programs in the price level using a key conditionality aspect of Fund
arrangements with transition countries – the performance criteria6. The hypothesis is
that countries with more successful implementation of the conditionality of the Fund
programs also tend to undertake policies, which result in a better performance of
macroeconomic indicators such as inflation.
For testing purpose we use the Program Implementation Index7 (PII) which measures
the extent of compliance with performance criteria. The cross-country analysis
considers 17 transition countries that have undergone Fund programs in the period 1994
to 2000. (See Table No. 1 for further information on the programmes)
The first regression (showed in Table 2) tests the association between the Fund program
implementation and inflation. Other variables such as economic growth, domestic
credit, aggregate transition index, measured by IMF and/or EBRD, are included in the
regression. The parameters have the expected sign, with the regressors explaining 82 %
of changes of the dependent variable. The compliance with the Fund criteria lowers
inflation but the coefficient on this variable is statistically significant only at 10 % level.
The parameter for the aggregate transition index is also statistically insignificant in
explaining inflation. In the second regression (Table No.3) we exclude the aggregate
transition index and include the initial conditions index. Statistically is not
straightforward to include this index. The reasons are two. Firstly, it is difficult to
measure it in such way that it will appropriately rank the countries by their level of
development, trade with CMEA, macroeconomic disequilibria, distance to EU, state
capacity, etc. Secondly, its effects becomes increasingly less important, being offset by
better policies. But as noted in Havrylshyn et al, 1999, it is worthy to include it. In fact,
the goodness of fit increases in 86 %. The parameter on initial conditions has a positive
sign, which could be explained by the effects of price and trade liberalisation reforms,
which are usually undertaken at the beginning of the programs. The program
implementation index becomes much more insignificant. The variable deletion test
suggests its exclusion from the regression and the adjusted R squared increases after we
exclude it (Table No. 4). The change in domestic credit keeps its significance through
all the tested equations. An explanation for this could be also that this variable present
an important policy instrument included in most of the IMF supported programs.
6
Performance criteria consist of a set of numerical floors and ceilings placed on various macroeconomic
policy instruments or outcomes. While structural benchmarks vary depending on the country’s specific
needs for structural adjustment, PC tend to be generic across programs.
7
The way it is measured is presented in both papers by Havrylshyn et al and Mercer-Blackman et al.
The index is also included in the IMF database (MONA).
54
Ermelinda Fejzulla
The insignificant coefficient, of the program implementation index variable, may assess
that the impact of the programmes on inflation is less than that the critics or the
defenders of the Fund generally pronounce it. Anyway, these results should be taken in
consideration with caution. They do not mean that successful implementation by itself
could result in better performance of the indicator, because as noted in Killick et al,
1993,there is no more than a moderate connection between programme execution and
the achievement of desired results. Rather, as noted by Mercer-Blackman et al, 2000,
better compliance with program conditionality could be related to other factors, that also
affect positively macroeconomic indicators, such as the greater willingness of the
country authorities to follow the reforms, or the higher speed of reforms like
liberalisation and stabilisation undertaken within the program.
A Review of the Controversies and Evaluation Approaches
on the IMF’s Supported Programmes
TABLE 1:
55
The IMF Supported Programmes in Place During the Period
1990 – 2002 in Transition Economies.
COUNTRY
TYPE
OF
FACILITY
SBA
ESAF
Emergence Program
ESAF - PRGF
APPROVAL DATE
24- Aug - 1992
14 - Jul - 1993
May - 1997
13 - May - 1998
EXPIRATION
DATE
23 - Aug - 1993
13 - Jul - 1996
April - 1998
12 - May - 2001
2. Armenia
SBA
ESAF - PRGF
28 - Jun - 1995
14 - Feb - 1996
27 - June - 1996
13 - Feb - 1999
3. Azerbaijan
SBA
ESAF
EFF
17 - Nov - 1995
20 - Dec - 1996
20 - Dec - 1996
16 - Nov - 1996
- Dec - 1999
- March- 2000
4. Bosnia & Herzegovina
SBA
29 - May - 1998
31 - March - 2001
5. Bulgaria
SBA
SBA
SBA
SBA
SBA
EFF
15 - March - 1991
17- Apr- 1992
11 - Apr - 1994
CAPut!’ - Jul - 1996
11 - Apr - 1997
25- Sept - 1998
14 - March - 1992
16 - Apr - 1993
31 - March - 1995
18 - March - 1998
(off - track)
10 - Jun - 1998
24 - Sept - 2001
6. Croatia
SBA
EFF
14- Oct - 1994
12 - Mar - 1997
13 - Apr- 1996
11 - Mar - 2000
7. Estonia
SBA
SBA
SBA
SBA
SBA
SBA
16 - Sep - 1992
27 - Oct - 1993
11 - Apr- 1995
29 - Jul - 1996
17 - Dec - 1997
1 - Mar - 2000
15 - Sep - 1993
27 - Mar - 1995
10 - Jul - 1996
28 - Aug - 1997
16 - Mar - 1999
31 - Aug - 2001
8. Georgia
SBA
25- Jun - 1995
ESAF - PRGF
28 - Feb - 1996
27 - Jun - 1996
(canceled in Feb/28)
13 - Aug - 1999
SBA
EFF
14 - Mar - 1990
20 - Feb - 1991
SBA
15 - Sep - 1993
SBA
15- Mar - 1996
10. Kazakhstan
SBA
SBA
EFF
EFF
26 - Jan - 1994
05 -Jun - 1995
17 - Jul - 1996
13 - Dec - 1999
11. Kyrgyz Republic
SBA
12 - May - 1993
1. Albania
9. Hungary
13- Mar - 1991
Feb - 1994 (canceled
in Sep/1993)
14 - Dec - 1994
(disagreement with
IMF
14 - Feb - 1998
25 - Jan - 1995
05 - Jun - 1996
16 - Jul - 1999
12 - Dec - 2002
11 - Apr - 1994
(off track)
56
Ermelinda Fejzulla
ESAF
PRGF
20 - Jul - 1994
26 - Jun - 1998
26 - Mar- 1998
25 - Jun - 2001
12. Latvia
SBA
SBA
SBA
SBA
SBA
14 - Sep - 1992
15 - Dec - 1993
21 - Apr - 1995
24 - May - 1996
10 - Oct - 1997
13 - Sep - 1993
14 - Mar - 1995
20 - May- 1996
23 - Aug- 1997
09 - Apr - 1999
13. Lithuania
SBA
SBA
EFF
SBA
21 - Oct - 1992
22 - Oct - 1993
24 - Oct - 1994
8 - Marc - 2000
14. Macedonia,
F.Y.R
SBA
ESAF
05 - May - 1995
11 - Apr - 1997
20 - Sep - 1993
21 - Mar - 1995
(cancelled)
23 - Oct - 1997
7 - Jun - 2001
05- Jun - 1996
10 - Apr - 2000
15. Moldova
SBA
SBA
EFF
17- Dec - 1993
22 - Mar - 1995
20 - May - 1996
16 - Mar - 1995
21 - Mar - 1996
May - 2000
16. Romania
SBA
SBA
SBA
SBA
SBA
11 - Apr- 1991
29 - May - 1992
11 - May - 1994
22 - Apr - 1997
05 - Aug - 1999
17. Russian Federation
SBA
SBA
EFF
SBA
05 - Aug - 1992
11 - Apr - 1995
26 - Mar - 1996
28 - Jul - 1999
10 - Apr - 1992
28 - Mar - 1993
24 - Apr - 1997 (offtrack)
21 - May - 1998
31 - May - 2000
04 - Jan - 1993
10 - Apr - 1996
25 - Mar - 1999
27 - Dec - 2000
18. Tajikistan
SBA
PRGF
08 - May - 1996
24 - Jun - 1998
07 - Dec - 1996
23 - Jun - 2001
CAPut!’. Ukraine
SBA
SBA
SBA
EFF
07 - Apr - 1995
10 - May - 1996
25 - Aug - 1997
04 - Sept - 1998
06 - Apr - 1996
09 - Feb - 1997
24 - Aug - 1998
03 - Sept - 2001
Sources: IMF, Annual Report of year 2000 and IMF Occasional Paper No. 184.
A Review of the Controversies and Evaluation Approaches
on the IMF’s Supported Programmes
TABLES No. 2-3-4: Econometric Testing Results
TABLE No. 2
Dependent variable is INFLATION
Regressor
Coefficient
T-Ratio
[Prob]
Constant
20.5170
.9119
[.380]
DG
-1.9496
-2.8648
[.014]
Economic growth rate
PII
-.22313
-1.1851
[.259]
Programme Implementation Index
DDC
.55759
6.1973
[.000]
Domestic Credit Change)
ATI
3.0822
.52796
[.607]
Aggregate Transition Index
*********************************************************************
R-Squared= .86927
R-Bar-Squared= .82570
Overall F-statistics. F( 4, 12) = .9486[.000]
*********************************************************************
Diagnostic Tests
*********************************************************************
* A:Serial Correlation
CHSQ( 1)= 1.0369[.309]
F( 1, 11)= .71450[.416]
*
*
*
*
* B:Functional Form
CHSQ( 1)= 6.6387[.010]
F( 1, 11)= 7.0480[.022]
*
*
*
*
* C:Normality
CHSQ( 2)= 1.8990[.387]
Not applicable
*
*
*
*
* D:Heteroscedasticity
CHSQ( 1)= .60402[.437]
F( 1, 15)= .55259[.469]
*********************************************************************TABL
TABLE No. 3
Dependent variable is INFLATION
*********************************************************************
Regressor
Coefficient
T-Ratio
[Prob]
CT
18.1310
1.1119
[.288]
DG
-2.4343
-3.5746
[.004]
PII
-.090537
-.49560
[.629]
DDC
.57489
7.0327
[.000]
INITCOND
1.9034
1.7504
[.106]
*********************************************************************
R-Squared
.89344 R-Bar-Squared
.85793
F-stat. F( 4, 12) 25.1542[.000]
*********************************************************************
Diagnostic Tests
*********************************************************************
* A:Serial Correlation
CHSQ( 1)= .49074[.484]
F( 1, 11)= .32698[.579]
*
*
*
*
* B:Functional Form
CHSQ( 1)= 3.7028[.036]
F( 1, 11)= 2.8446[.076]
57
58
Ermelinda Fejzulla
*
*
*
*
* C:Normality
CHSQ( 2)= .62745[.731]
Not applicable
*
*
*
*
* D:Heteroscedasticity
CHSQ( 1)= .029312[.864]
F( 1, 15)= .025908[.874]
*********************************************************************
TABLE No. 4
Dependent variable is INFLATION
*********************************************************************
Regressor
Coefficient T-Ratio
[Prob]
CT
10.2487
2.9355
[.012]
DG
-2.5838
-4.3599
[.001]
DDC
.58610
7.6877
[.000]
INITCOND
2.1084
2.1602
[.050]
*********************************************************************
R-Squared = .89126
R-Bar-Squared = .86617
F-stat. F( 3, 13) = 35.5182 [.000]
*********************************************************************
Diagnostic Tests
*********************************************************************
* A:Serial Correlation
CHSQ( 1)= .37927[.538]
F( 1, 12)= .27383[.610]
*
*
*
*
* B:Functional Form
CHSQ( 1)= 3.4830[.052]
F( 1, 12)= 2.4347[.089]
*
*
*
*
* C:Normality
CHSQ( 2)= .29613[.862]
Not applicable
*
*
*
*
* D:Heteroscedasticity
CHSQ( 1)= .0040954[.949]
F( 1, 15)= .0036144[.953]
*********************************************************************
A Review of the Controversies and Evaluation Approaches
on the IMF’s Supported Programmes
59
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Arsena Gjipali
Emigration and its Economic Consequences;
the Transition Phase of Albania
Introduction
Emigration phenomenon characterizes the transition period for the Central and Eastern
European countries, but from the size and its role in the restructuring of the country,
emigration for Albania is of profound importance. It has accompanied Albanian
transition for more than one decade being at the same time the result of it. The first
flows of people towards foreign embassies in 1990 on the other hand, sign the very
beginning of the transition phase.
The paper takes a brief view on the size and structure of emigration to continue with its
macroeconomic effects on the economy, that particularly are:
On the Labor market (the effects implicating the level of unemployment, creation of
the human capital etc.);
Related to remittances that affect investments, consumption and import financing,
alleviating the negative pressures of deficit on the balance of trade;
The relative steadfastness of the exchange rate between “Lek” and other foreign
values, contributing to maintaining slow level of inflation, since imported goods
have a significant share in the consumer commodities which are measured for
inflation.
Given the informal nature of the phenomenon, researchers and policy – makers face the
problem of the absence of detailed information about migration in particular, the
inadequacy of official information sources, very difficult to obtain especially in
transition economies. Studies conducted in this field are mainly based on theoretical
approaching and models, and different surveys on groups of people.
Consequences of immigration on host countries are another topic of this paper, showing
at the same time the policy implications for both, native and host countries.
1. The structure of emigration
The eruption of migration was the first step of the Albanian economic transformation
towards an open economy. The number of the Albanians who have emigrated during the
last 12 years is steadily increased and yet accounts for about 700000 people (at about
20% of the population 2. According to surveys, emigration has touched young ages in
both genders, affecting in such a way the labour market in Albania. 67.7 % of emigrants
are males, while 32.3 % are females. As about the average age of emigrants, it is 30.6
years old for males and 32 years old for females. Males group of 20-24 ages make up
the bulk of the males leaving the country whereas most of the women are around 30-34
years old (Living Condition Survey 1998,INSTAT 2001). Migration towards foreign
countries is more notable in the south areas, implying low levels of unemployment for
these regions. The rates of unemployment are around 13,4% in the south where mass
emigration exists, and about 19,1% in the northeastern areas where the level of
emigration is lower (Albanian Human Report).
2
Estimated by the Greek Ministry of Foreign Affairs
Arsena Gjipali
64
Table 1: Main indicators of population compound (in thousand)
Year
1993
1994
1995
1996
1997
1998
1999
Population
3202
3248,8
3283
3324,3
3354,3
3354
3373
Labor Force
1347
1423
1309
1247
1301
1320
1305
Employment
1046
1161
1138
1116
1107
1085
1065
Rate of unemployment 22,3
18,4
13,1
12,4
14,9
17,8
18,2
Emigrants*
381
353
413
476
571
690
NA
Rate of emigration**
11,9
10,86
12,6
14,3
17
20,6
NA
Source: INSTAT and Bank of Albania
* The figures for the emigrants are from the Greek Ministry of Foreign Affairs
** Own calculations (calculated as a ratio of the number of emigrants over the number of
population).
2000
3401
1283
1068
16,8
NA
NA
the total
Albanian emigration is often driven by seasonal and temporary employment. The
destination of emigrants flows is notably affined from the geographical neighbourship
to the host countries (the case of Greece and Italy), the easy access and the possibility of
having several entrances for the seasonal emigrants who reach their familiars at home
and the lower costs of movement compared to that from the other countries 3, as well as
from the economic, historical and cultural affinity.
Table 2:
Greece
54,7
Emigration by states (in percentage)
Italy
30,8
USA
4,1
Germany
3,9
Switzerland
1,1
France
0,9
Other
4,5
Source: INSTAT, July 2001 Results of Households living condition survey (October 1998)
2. Implications in the domestic labour market
Emigration flows enhance job creation both directly (through remittances) and
indirectly, by reducing the burden of unemployment on the government.
Thus, being that the average age of the emigrants is 28.8 years old (BoA 1999), the
decreasing levels of the rate of unemployment during the years show emigration’s
important impact in the reduction of unemployment rate, especially for the first 1990s,
when the big masses of people were directed abroad.
It is impossible to estimate precisely what percentage of the labor force is working
abroad, and thus to estimate the release of unemployment, because emigration takes
place across the whole population and not just among those of working age.
It should be emphasized that due to the short-term nature of most of the emigration, and
the fact that much of it is clandestine, many of these emigrants might be included also in
the labour force figures, both employed and unemployed.
Referring to surveys however, the analysis based on the economic status of the
emigrants (Household Condition Survey 1998, INSTAT 2001) reveals that 76 percent
of them have jobs, 7 percent follow studies and about 15 percent are unemployed 4. But
these analyses don’t say anything about the nature of employment for those who have
jobs.
If we consider the figures for the 1998 (Table 1), with simple mathematics we can
estimate the hypothetical rate of unemployment if there was no emigration hence the
potential rate of unemployment:
First multiply the number of emigrants with the percentage of those employed and
unemployed abroad:
(75,5% + 15,3%) * 690 (emigrants) = 626,52 (in thousand)
3
4
For those who had emigrated, the majority had left more than once. See Kule et al, 2000
Results of Household Living Condition Survey, October 1998, INSTAT, Tirane, July 2001
Emigration and its Economic Consequences; the Transition Phase of Albania
65
We figure out that from 690000 emigrants, about 626,52 of them are a labor force.
If we add this number to the actual labor force in the country and to the total
unemployment, we find out the potential rate of unemployment:
Potential rate of unemployment = (626,52 + 1320)/ 626,52 + 235) = 44,25%
This hypothetical rate of unemployment seems to be much higher than the real one with
the participation of emigration phenomenon.
The impact of emigration on the labor market is visible not only by the direct reduction
of the rate of unemployment. Remittances and the experience acquired abroad are good
incentives for job opportunities at home. Money flows from emigrants create the
possibility for private investments and hence self-employment. Besides, with the job
skills acquired abroad, those who return seem to have more chances for finding a job
than the “non-emigrants”4.
The effects of emigration on the transition Albanian economy are explored in
Papapanagos and Sanfey 1997, in a theoretical model. Based on the assumption that job
creation in the private sector is a linear function of profits per employee (Aghion and
Blanchard 1994), the model analyzes the determinants of the optimal speed of transition
by using a dynamic framework. The main conclusion is that emigration, by improving
the rate of job creation in the private sector and by reducing the burden of
unemployment on the government, may lead to an earlier switch to rapid adjustment of
labor, and hence to a faster transition towards a market economy.
The impact of emigration in the Albanian economy has also the other part of the coin.
The diminishing of the labor force is spread in all the levels of human capital. The very
concerning problem has to do with the “brain drain”. Various surveys show that during
1990-1999, approximately 40% of the professors and research scientists of the
universities and science institutions in the country have emigrated. This exodus is
growing and a 1998 survey shows that even more of the highly educated people want to
emigrate (Albanian Human Report 2000).
3. Emigrants remittances
Emigrants’ remittances represent approximately one fifth of GDP5, almost twice as
much as foreign exchange revenues from exports, almost four times the value of direct
investments and approximately 60% more than the revenue generated by industrial
production 5.
Table 3: Remittances and other components of Balance of Payment (in thousand)
Year
Imports
Exports
Direct
investments
Private
transfers*
1993
620.5
111.6
1994
601.0
141.4
1995
679.8
204.8
1996
922.0
243.7
1997
693.5
158.6
1998
811.7
208.0
1999
937.9
275.1
2000
1076.4
255.4
68.0
53.0
70.0
90.1
47.5
45.0
41.2
143.0
324.1
374.1
348.9
476.0
235.7
421.3
188.4
438.6
Source: Bank of Albania (Statistical report, February 2001)
* Remittances are shown in their net value.
4
See Kule Dh. , Mançellari, A. , Papapanagos, H. , Qirici, S. & Stanfy, P., “The causes and consequences
of Albanian emigration during transition. (2000)
5
Albanian Human Report 2000
Arsena Gjipali
66
A relative comparison of remittance data for all the Mediterranean countries has shown
that Albanian emigrants’ remittances are significantly higher. As a percentage of GDP,
they are approximately 2.5 times higher than in Yugoslavia, 5.1 times higher than in
Turkey, 7.7 times higher than in Greece and 40 times higher than in Italy 5. This trend is
partially explained by the low level of GDP in Albania.
The income effects of remittances on consumption, production, imports, employment
are shown through a sectorial analysis by NicholasGlytsos, 1993, in the case of Greece,
and the author develops also empirical results. As far as dates are available, what we
can show here is the relationship between remittances and imports. Because of the low
level of GDP per capita, a good share of revenues goes for consumption. In the
Albanian case, consumption is very closed related to imports, since they compound the
biggest share for the deficit of the trade balance. In the graph below one can see broadly
similar patterns in the two trends, although the match between them is far from perfect.
Figure 1: Imports versus Remittances
160
Imports,Private Remittances
140
Imports
Private remittances
120
100
80
60
40
20
0
1
6
11
16
21
26
31
36
41
46
51
56
61
66
71
76
81
86
91
96 101 106
months
Imports and Private Remittances figures are in million $. The period measured is January 1993-December
2001. The data are from Bank of Albania, the Balance of Payment.
This convergence is maintained almost for all the months, besides the period of 19971998. The explanation for that is the political instability and social unrest in the second
part of 1996 and in 1997 Albania was faced with. The inability of the financial and
banking sector to respond promptly to the financial needs of growing private sector led
to a flourishing informal financial market, and to the expansion of the pyramid schemes.
The unprecedented high interest rates offered by these schemes especially at the end of
1996 swallowed much of the domestic savings and remittances from abroad. In
consequence, because of the lost of trust in the financial sector, remittances show
decreasing levels after the year 1997.
The unstable situations in the Balkan region and the Kosovo crisis, in 1999, are another
reasons for diminishing remittances in this year. Foreign aids during this period were a
substitute of remittances, providing the balance of payment with the foreign currency
needed.
Emigration and its Economic Consequences; the Transition Phase of Albania
67
3.1 The impact of Remittances in the Albanian macroeconomic stabilization
process
The flow of remittances into Albania was maintained even after the narrowing of the
official interest rate differential between Albania and Greece continuing to finance both
consumption and investment in the expanding private sector. The decrease of interest
rates from government with the purpose of achieving the macroeconomic stability
hasn’t stopped the Emigrant remittances from growing continuously.
The stability of the nominal exchange rate can be attributed in large part to private
remittances from emigrants abroad. Remittances provide Albania with a much-needed
source of foreign exchange reserves, and help to finance an ongoing deficit in the trade
balance. Hadëri et al 1999 by using vector autoregression analysis, concludes that
remittances have a direct effect on the exchange rate and hence on the rate of inflation.
The analyses include the affect of M3, inflation and remittances in the exchange rate.
The result is that after a 12-month horizon, innovation to remittances, contribute nearly
30% to the explanation of the forecast error variance of the exchange rate, while
innovations in the in the inflation rate and money growth explain very little. Meanwhile
taking lessons for other transition countries from the Albanian experience, the absence
of significant flows of remittances for many of these countries means that maintaining a
stable exchange rate and low inflation becomes even more of a challenge.
As mentioned before, the macroeconomic shocks in Albanian transition economy on the
other side have affected the flows of remittances from abroad. This shows that
emigrants with their remittances are sensible to the different developments of the
macroeconomic shocks, affecting in the same way the exchange rates and the inflation
rate.
4. Emigration and investments
Remittances have been an important source of finance for domestic investment. The
majority of remittances have gone towards business development, housing and personal
savings in banks.
Albanian Human Report 2000, shows that from studies conducted on the start-up capital
for small and medium size private business, that 39% of the funding comes from family
members in Albania or abroad, of which 17,5% are remittances. Whereas finance from
government programs and bank credits account for only 9%.
World trends6 have shown that in most cases, remittances are spent on consumer and
individual goods and assets (household appliances, cars, land purchase, and shops)
rather than investment in production. This trend is to a certain extent present in Albania
(as mentioned before), where more than halves of the numbers of private enterprises are
trade enterprises. Among all firms (including those where the owner had never
emigrated) remittances contribute about 17% to the establishment of businesses (Kule et
al 2000).
Remittances have also served in alleviating the housing problem. Recent surveys show
that 60% of new apartments have been constructed with remittances. They have also
aided the recovery of the banking sector through increased savings.
Different surveys show that Albanian emigrants want to invest two thirds of their
savings in Albania and a third in the country where they have emigrated. The top
investment priority is the purchase of land and construction of a house in their
hometown. Bank savings in the country where they have emigrated, is also a high
priority.
6
See Nicholas Glytsos, “Measuring the income effects of migrant remittances: A methodological
approach applied to Greece”
68
Arsena Gjipali
There do not exist dates about consumption and private investments to show the extent
to which remittances are used for investment rather than consumption purposes. The
results and figures come from surveys made through questionnaires.
5. Consequences of migration for the host countries and policy implications
Different studies show that immigration is generally considered to be beneficial for the
host economies (see, for example Borjas 1994; 1995, Friedberg, M. and Hunt, J.
1995;Williamson, J. G. and Hatton, T.J., 1992). Borjas (1990) concludes that the impact
of immigration on the wages of natives is negligible. This is particularly true in cases
where native and immigrant workers are complements.
Friedberg, M. and Hunt, J. 1995, in their study, suggest that 1 percent point rise in the
net migration rate rises long-term growth by 0.01 percent for the United States and by
0.04 percent for Japan.
On the other side, the contribution of the Albanian emigrants to the GDP of the country
is about 2 %. (Mançellari et al 1999).
All of the above show there do exist benefits from emigration for the origin and
destination countries, and policies towards this phenomenon should be directed in the
right way in order to receive the right ones. Agreements between the country of origin
and the host country especially for the temporary emigration would ease the costs of
emigration for individuals, release the burden of unemployment and make it
measurable. The informal character of this issue has to do with the uncontrolled and
illegal movements of people who intend to emigrate. Controlling and planning
emigration with the right politics, directing remittances through the right channel of the
formal banking system, and create the appropriate environment for the private
investments with the remittances would be the duties for the government, in order to
release the burden of transition and speed the way to the stability.
Emigration and its Economic Consequences; the Transition Phase of Albania
69
Literature
Albanian Human Development Report 2000.
BANK OF ALBANIA [1999]: Annual Report
FRIEDBERG RACHEL M., HUNT JENNIFER [1995]: “The impact of immigration on
host country wages employment and growth”, Journal of Economic perspectives,
Volume9, Nr.2,Spring, pp.23-44.
GEORGE J.BORJAS [1994]:"The economics of immigration, Journal of economic
literature, Vol. XXXII (December) pp.1667-1717.
GEORGE J.BORJAS [1995]: “The economic benefits from immigration”, Journal of
Economic perspectives, Volume9, Nr.2, Spring, pp.3-22
GLYTSOS, NIKOLAS, P. [1993]: “Measuring the Income Effects of Migrant
Remittances: A Methodological Approach to Greece”. Center of Planning and
Economic Research, Athens, Greece.
HADËRI, S., PAPAPANAGOS H., SANFEY, P., TALKA, M. [1999]: “Inflation and
Stabilization in Albania”. Post - Communist Economies, Vol.11, No.1.
HATON, TIMOTHY, J. [1992]: “International Migration and World Development: A
Historical Perspective”, National Bureau Of Economic research, September.
KULE DH. , MANÇELLARI, A., PAPAPANAGOS, H. , QIRICI, S. & STANFY, P.
[2000]: “The causes and consequences of Albanian emigration during transition:
evidence from micro – data”. Working Paper 46, January.
MANÇELLARI, A., PAPAPANAGOS, S., SANFEY, P. [1996]: “Job Creation &
temporany emigration: The Albaniane xperience”. January
MANÇELLARI, A. & SANFEY, P. [1998]:
Countries: the case of Albania”. August.
“Intention to Emigrate in transition
MANÇELLARI, A., KULE, DH., QIRICI, S. & SANFEY, P. [1999]:
Markets & Emigration in Albanian”. April.
PAPAPANAGOS, H. & SANFEY, P. [1997]:
Transition”, December.
“Labour
“Emigration and the Optimal Speed
INSTAT, [2001]: Results of Hausehold Living Conditionin Survey (October '98).
Tiranë July.
Statistical Report [2001]: Bank of Albania. (February '02).
Elido Liko
Exchange Rate Variability and Policy Implication
Abstract
This article analyses the development of exchange rate and tries to explain the volatility of
exchange rate during the transition period in Albania. Exchange rate is an important
macroeconomic variable for a small open economy like my country. The formal exchange rate
market and the informal one, exist both in Albania. Both markets perform a large transaction
volume and have an important market share. In this work, I have used only the data generated
by the formal market, because the data of the informal market are not very accurate and often
contradictory.
► Volatility of exchange rate has a strong impact on domestic price of imported goods. In
Albania the total volume of Import is three times larger than export.
► Volatility of exchange rate effects directly the consumer’s decision since they have an
essential part of there saving on foreign currencies.
► The variability of exchange rate may also have serious complication for performance of our
monetary policy. Foreign private banks dominate our second level banking system. The
volatility of exchange rate, forces the banks to give more credit to the foreign currencies to
fulfill the need of the market. In 1998 these banks gave 51.3% of total volume of credit to
private sector on foreign currencies and on 2000 these amount increase to 80.5%.
Before 1990 in Albania was applied fixed – exchange rate of lek (our national currency) with
foreign currencies. After starting the democratic reform, it was impossible for BoA, that was
losing the state reserves of transaction to secure the fix exchange rate, so in July 1992 in
Albania was implemented the flexible exchange rate.
The demand and supply for foreign currencies determine the exchange rate course. This article
aims to analyze the factors that determine the exchange rate and tries to find the best model that
generates exchange rate forecasting. Having into consideration that our national currency is not
traded out of the country boarders, and that it has to face the foreign currency that comes in our
country mostly by trade channels, the role of exchange rate market is very limited.
1 Empirical analyze of exchange rate Development
For creating an overall view of behavior of exchange rate during the transition period first I
repressed a graphical link with monthly base of exchange rate between Lek and USA $. The
reason for choosing this exchange rate is the fact that many transactions in Albania are
performed in US dollar. Time series between Lek and euro is relatively young and could not by
used for generating accurate future forecasting.
The exchange rate used is 1$ → x lek. As it is shown on the chart the tendency of
exchange rate is growing. There are two main breaking points on the exchange rate
Elido Liko
72
Course. The first happened in 1992 and the second in1997. In 1992 there was a big devaluation
of lek, as a result of price liberalization. The high inflation expectation of economic agents,
influenced negatively on exchange rate course. The official exchange rate from 50 lek/us$ grew
to 100 lek/us$.
Exchange rate between lek and US dollar
Lek/US$
180
Without seasonal effect
160
140
120
100
80
1993
1996
1999
Decreasing of the total of the export volume on that time and the reaction of individuals and
firms that began to stockpile their saving on real good - that reserve their value better that
money in an inflation environment such as it was created in the country - had a negative effect
in exchange rate stability.
The second breaking point happened in 1997, and it corresponds with the ruin of pyramidal
schemes. The public lost the faith in our banking system and the value of lek fell about 40%
against main foreign currency. The consumer price index was increased by 62%.
The policy implemented by Bank of Albania by that time was efficient and managed to stabilize
the exchange rate course. The increasing on official interest rate for deposits in lek for state
owned banks, about 37% compared to the previous period, returned the public faith on banking
system. The public, began to increase the deposit in lek, and so exchange rate course began to
evaluate in the mid of 1998.
This empirical study aims to evaluate the trend of exchange rate course and to find the best
model that generates future expectation for exchange rate. In these study I use both
multiplicative model and ARIMA model. The reason for using multiplicative model in this
stage of analyze is the strong linkage that exists between these elements in practice.
ERt=Tt*Ct*St*It
The elimination of the seasonal effect it is used first the moving average with four terms and
then a centered moving average. After eliminating the seasonal and irregular component, the
trend of time series is determined and future expectation for exchange rate is constructed.
Exchange Rate Variability and Policy Implication
73
The dependent variable exchange rate:
***********************************************************************************
Regression
INTCP
TIME
Coefficient
91.76700
0.58800
Standard Error
2.987000
0.046000
T-Ratio
30.72000
12.70800
***********************************************************************************
R2=0.597; Rκ2=0.593
F=161.490
The linear trend is statistically significant. It will also be used for constructing future
expectation for 2000 since the data it contains, cover the period from 1993 to 2001.
Based on these trend the forecast for January 2002 it is 1$ → 157.621 Lek
The real value of exchange rate between lek and US dollar was 1$ → 142.24 Lek. The
estimation error on absolute term it is 15.38 lek per US dollar.
The future expectation generated by this linear regression overvalues the real exchange rate. I
think the reason for this distortion of future expectation, is as a result of using one single linear
trend, to explain all the date involved in the sample period. Considering the fact that in 1997 the
exchange rate time series have an important breaking point I use a dummy variable for this year.
The dependent variable exchange rate
************************************************************************************
Regression
Coefficient
INTCP
93.95504
TREND
0.140901
DM97
35.91074
Dependent variable ER
Standard Error
2.372575
0.665829
4.393331
T-Ratio
39.5583
2.140414
8.17392
************************************************************************************
Rκ=0.746432
F=162.9044
The determination coefficient is increased significantly. This meant that the second model
explains a big part of the variation of dependent variable compared with first one. All the
coefficients of this regression are statistically significant.
Based on this regression the forecast for 2002 it is 1$ → 132.38 lek. The real value was
1$ → 142.24 lek. The estimation error in absolute term is 9.86 lek per US dollar. The forecast
generated by this model is more accurate than the first one (the forecast error in absolute value,
is lower). This results show, that a single linear trend does not justify the date observed. One
reason for these distortion, may be the fact that, time series of exchange rate may not be trend
stationary process but difference stationary process.
The Autoregressive Integrated Moving Average model (ARIMA) is used for the purpose of
testing these and generating more accurate expectation. For the identification process is used
only the graphical technique.
Elido Liko
74
Figure 1: Represent the autocorrelations function of exchange rate between lek and US dollar.
Autocorrelations: KURSI
Auto- Stand.
Lag Corr. Err. -1 -.75 -.5 -.25 0 .25 .5 .75 1 Box-Ljung Prob.
+----+----+----+----+----+----+----+----+
1 .978 .094
. I***.**************** 109.068 .000
2 .940 .093
. I***.***************
210.703 .000
3 .898 .093
. I***.**************
304.334 .000
4 .856 .092
. I***.*************
390.311 .000
5 .816 .092
. I***.************
469.186 .000
6 .785 .091
. I***.************
542.845 .000
7 .765 .091
. I***.***********
613.415 .000
8 .750 .091
. I***.***********
681.991 .000
9 .733 .090
. I***.***********
748.110 .000
10 .710 .090
. I***.**********
810.676 .000
11 .678 .089
. I***.**********
868.392 .000
12 .641 .089
. I***.*********
920.486 .000
13 .599 .088
. I***.********
966.391 .000
14 .551 .088
. I***.*******
1005.686 .000
15 .504 .087
. I**.*******
1038.843 .000
16 .459 .087
. I**.******
1066.643 .000
The sample autocorrelation function of exchange rate is persistently nonzero and does not tail
off until lag 16. The sample partial autocorrelation function is close to 1. The exchange rate time
series between lek and US dollar is not stationary therefore it exhibits a stochastic trend.
Figure 2: Represent the autocorrelations and partial autocorrelations function of the first
difference, of exchange rate course between lek and US dollar
Autocorrelations: KURSID
Auto- Stand.
Lag Corr. Err. -1 -.75 -.5 -.25 0 .25 .5 .75 1 Box-Ljung Prob.
+----+----+----+----+----+----+----+----+
1 .493 .094
. I***.******
27.477 .000
2 .113 .094
. I** .
28.936 .000
3 .000 .093
. * .
28.936 .000
4 -.091 .093
. **I .
29.903 .000
5 -.270 .092
*.***I .
38.441 .000
6 -.340 .092
***.***I .
52.124 .000
7 -.222 .091
****I .
58.044 .000
8 .012 .091
. * .
58.060 .000
9 .168 .091
. I***.
61.501 .000
10 .243 .090
. I***.*
68.782 .000
11 .182 .090
. I****
72.912 .000
12 .175 .089
. I***.
76.754 .000
13 .172 .089
. I***.
80.504 .000
14 .000 .088
. * .
80.504 .000
15 -.121 .088
. **I .
82.398 .000
16 -.174 .087
***I .
86.355 .000
Plot Symbols:
Total cases: 114
Autocorrelations *
Two Standard Error Limits .
Computable first lags: 109
Exchange Rate Variability and Policy Implication
75
Partial Autocorrelations: KURSID
Pr-Aut- Stand.
Lag Corr. Err. -1 -.75 -.5 -.25 0 .25 .5 .75 1
+----+----+----+----+----+----+----+----+
1 .493 .095
. I***.******
2 -.172 .095
.***I .
3 .026 .095
. I* .
4 -.112 .095
. **I .
5 -.236 .095
*.***I .
6 -.135 .095
.***I .
7 -.005 .095
. * .
8 .144 .095
. I***.
9 .110 .095
. I** .
10 .099 .095
. I** .
11 -.079 .095
. **I .
12 .062 .095
. I* .
13 .089 .095
. I** .
14 -.065 .095
. *I .
15 .048 .095
. I* .
16 -.069 .095
. *I .
The sample autocorrelation function of the first difference of exchange rate time series named
kursid, tail off exponentially. The partial autocorrelation function has two nonzero spikes at lag
1 and 5. So the first time series of exchange rate is stationary and the original time series is
integrated of order 1. Based on the corelogram of ACF and PACF ARIMA (5.1.0) is the more
suitable model for exchange rate. For estimation of the model parameters is used the ESSP
program.
ARIMA (5; 1; 0)
************************************************************************************
β
SEB
T-Ratio
Approx.prob
AR1
AR2
AR3
AR3
AR5
Constant
0.5534513
-0.1827756
0.0411091
0.0266306
-0.2299538
0.3476463
0.0949461 5.8287772
0.1095660 -1.6681775
0.1116743 0.3681165
0.1109117 0.2401067
0.0958844 -2.3982388
0.4637574 0.7496647
0.0000000
0.0980000
0.7130000
0.8110000
0.0180000
0.4550000
*************************************************************************************
The regression to estimate has a form:
ER*=α 0 + α1 ER*t-1+ α2 ER*t-5
ER* is the first difference of time series of exchange rate.
ER*= 0.35+0.55 ER*t-1 -0.23 ER*t-5
t
(0.35)
(5.828)
(-2.398)
Analyze of ACF and PACF of residuals for ARIMA (5.1.0) process does not show any
significant value of Autocorrelation or Partial autocorrelation at any lag. Therefore this model is
a good model and can be used for generating future expectation.
The forecast for 2002:
Elido Liko
76
∧
∧
ERJan _ 02 ERdec _ 02 = α
-
0
+ α 1 [ERDec−01 − ER Nov −01 ] + α 2 [ER Aug −01 − ER Jul −01 ]
∧
ERJan _ 02 =136.725
The real value of exchange rate was 1$ → 140.18 lek
The forecast error on absolute term 4.43 lek
Comparing with previous model, ARIMA generates more accurate forecast.
Although the value of estimation error, is better than the previous model, it still is not good
enough. The main reason for this distortion may be the fact that ARIMA model includes only
the present and the past values of exchange rate time series, between lek and US dollar. In the
next section, the empirical analyze is extended further, by including some more other important
macroeconomic variable on analyze.
2 - Factorial model
► The first variable included in the model, it is the interest rate. Before 1992 in Albania the
interest rate has not played an active role in economy. Although the interest rate was increased
during that period, the inflation growth was higher, because of the price liberalization process.
This is the reason that this time period is excluded from the analyze.
► Since our national currency is not traded abroad, the foreign currencies that came from trade
channel have important role in the determination of exchange rate course. So, the value of the
imported and exported goods is the second exogenous variable included in the factorial model.
For creating an overall idea of the role of trade channel on exchange rate development, first it is
represented a trade balance and exchange rate between lek and US dollar for the sample period.
Year
Export
Import
Trade
balance
Lek/us$
1993
111.7
601.6
-489.9
1994
141.3
601.0
-499.7
1995
204.8
679.8
-475
1996
243.7
922.0
-678.3
1997
158.6
693.5
-534.9
1998
208.0
811.7
-603.9
1999
257.1
937.9
-662.8
2000
255.8
1070.1
-814.3
2001
260.2
1073.6
-713.4
102.06
94.68
92.79
104.5
148.93
150.64
137.69
143.71
142.43
Source Bank of Albania
Albania is a country based mainly on imports. Devaluation of our currency has not brought to
improvements of trade balance. The demand for imported goods is quite perfectly price
inelastic, because many of imported goods are necessary goods.
For example, the devaluation of our currency in 1993 increased the trade deficit from $453
million to $489.9 million. The devaluation on 1996 increased the trade deficit from $475.0
million in 1995 to $677.3 million.
► Other variables included on the factorial model are: the money supply (M3) and the
consumer price index (CPI). In many studies about Albania economy, it is proved that the
exchange rate is one of the most important factors on determining inflation in Albania. The
rivers link between this macroeconomic variable may result also important. For this reason, the
CPI it is included in the model as exogenous variable.
Exchange Rate Variability and Policy Implication
77
Changes on the macroeconomic variables of the foreign countries are not taken into
consideration, because their effect on Albania exchange rate it is expected to be very small
compared to the impact of national variable.
Based on the features of our economy, the impact of imported goods and exported goods it is
analyzed separately.
The exchange rate between lek and US dollar is not a stationary time series. In the previous
section, it is shown that this time series is integrated of order one. So, before constructing the
factorial model, it is important to examine if others variable involved in the model are stationary
or not. If the other variables are integrated of the same order, then the link between them is
important and the problem of spurious regression is avoid. For checking the stationary of these
time series, a graphical examination it is used just as before
Figure 3: Autocorrel ation
funcion of
CPI
Lag Corr. Err. -1 -.75 -.5 -.25 0 .25 .5 .75 1 Box-Ljung Prob.
+----+----+----+----+----+----+----+----+
1 .973 .099
. I***.***************
96.690 .000
2 .945 .098
. I***.***************
188.747 .000
3 .916 .098
. I***.**************
276.098 .000
4 .889 .097
. I***.**************
359.356 .000
5 .866 .097
. I***.*************
439.197 .000
6 .845 .096
. I***.*************
515.967 .000
7 .822 .096
. I***.************
589.363 .000
8 .797 .095
. I***.************
659.133 .000
9 .770 .095
. I***.***********
724.966 .000
10 .742 .094
. I***.***********
786.738 .000
11 .712 .094
. I***.**********
844.282 .000
12 .681 .093
. I***.**********
897.512 .000
13 .648 .093
. I***.*********
946.367 .000
14 .615 .092
. I***.********
990.916 .000
15 .581 .092
. I***.********
1031.107 .000
16 .546 .091
. I***.*******
1067.061 .000
Plot Symbols:
Autocorrelations *
Two Standard Error Limits .
Chart4.Autocorrelatio of: IM
Auto- Stand.
Lag Corr. Err. -1 -.75 -.5 -.25 0 .25 .5 .75 1 Box-Ljung Prob.
+----+----+----+----+----+----+----+----+
1 .838 .095
. I***.*************
77.936 .000
2 .702 .094
. I***.**********
133.137 .000
3 .595 .094
. I***.********
173.173 .000
4 .503 .094
. I***.******
202.079 .000
5 .487 .093
. I***.******
229.398 .000
6 .435 .093
. I***.*****
251.437 .000
7 .415 .092
. I***.****
271.732 .000
8 .371 .092
. I***.***
288.069 .000
9 .391 .091
. I***.****
306.392 .000
10 .401 .091
. I***.****
325.845 .000
11 .405 .090
. I***.****
345.904 .000
12 .423 .090
. I***.****
368.070 .000
13 .325 .089
. I***.**
381.269 .000
Elido Liko
78
14 .282 .089
15 .233 .088
16 .206 .088
Plot Symbols:
. I***.**
. I***.*
. I****
Autocorrelations *
391.322 .000
398.272 .000
403.745 .000
Two Standard Error Limits .
Figure 5: Represent the autocorrelation function of interest rate
Autocorrelations: INTERES
Auto- Stand.
Lag Corr. Err. -1 -.75 -.5 -.25 0 .25 .5 .75 1 Box-Ljung
Prob.
+----+----+----+----+----+----+----+----+
1 .981 .110
. I***.****************
79.015 .000
2 .948 .110
. I***.***************
153.725 .000
3 .903 .109
. I***.**************
222.310 .000
4 .849 .108
. I***.*************
283.868 .000
5 .792 .108
. I***.************
338.128 .000
6 .733 .107
. I***.***********
385.267 .000
7 .675 .106
. I***.*********
425.735 .000
8 .617 .105
. I***.********
460.039 .000
9 .560 .105
. I***.*******
488.756 .000
10 .505 .104
. I***.******
512.361 .000
11 .445 .103
. I***.*****
530.986 .000
12 .382 .102
. I***.****
544.942 .000
13 .315 .102
. I***.**
554.575 .000
14 .247 .101
. I***.*
560.592 .000
15 .180 .100
. I****
563.827 .000
16 .114 .099
. I** .
565.148 .000
Plot Symbols:
Autocorrelations *
Two Standard Error Limits .
Figure 6: Represent
Autocorrelation function of M3
Auto- Stand.
Lag Corr. Err. -1 -.75 -.5 -.25 0 .25 .5 .75 1 Box-Ljung Prob.
+----+----+----+----+----+----+----+----+
1 .970 .095
. I***.***************
104.461 .000
2 .940 .094
. I***.***************
203.448 .000
3 .910 .094
. I***.**************
297.133 .000
4 .884 .094
. I***.**************
386.356 .000
5 .858 .093
. I***.*************
471.221 .000
6 .832 .093
. I***.*************
551.752 .000
7 .805 .092
. I***.************
627.995 .000
8 .779 .092
. I***.************
700.068 .000
9 .753 .091
. I***.***********
768.056 .000
10 .726 .091
. I***.***********
832.039 .000
11 .700 .090
. I***.**********
892.124 .000
12 .674 .090
. I***.*********
948.388 .000
13 .647 .089
. I***.*********
1000.788 .000
14 .620 .089
. I***.********
1049.375 .000
15 .593 .088
. I***.********
1094.318 .000
16 .568 .088
. I***.*******
1136.013 .000
Exchange Rate Variability and Policy Implication
79
Dependent variable Exchange rate
************************************************************************************
Regresor
INTC
CPI
IM
M3
I
Coefficient
48.36918
0.389840
-0.234010
0.208761
1.543818
Standard Error
5.239565
0.133819
0.042980
0.033021
0.137830
T-Ratio
9.231645
2.913188
-5.444605
6.321959
11.20081
************************************************************************************
Kκ=0.912455
The above regression expresses the relationship between the exchange rate monetary supply
(M3), the interest rate, the imports and the consumer price index. From theoretical point of
view, the interest rate would have a negative effect on exchange rate course. The reason for this
distortion is the multicolinearity that exists between explanatory variable.
Dependent variable Exchange rate
************************************************************************************
Regressor
INTCP
M3
I
EXP
CPI
Coefficient
34.99383
0.122378
1.465182
-0.215094
0.648076
Standard Error
5.676813
0.033799
0.170215
0.165734
0.148451
T-Ratio
6.164344
3.620738
8.607806
-1.297830
4.365564
************************************************************************************
Rκ=0.87
The second regression expresses the relationship between the exchange rate, the exports the
money supply, the interest rate and the consumer price index. In this regression export and
interest rate have not the right signs. The model suffers of multicolinearity.
The generation of future expectation, based on factorial models, as represented above in a
certain sense is limited since both models suffer of multicolinearity. A more detailed model
should be constructed, to determine the impact of specific factors of current account, such as the
emigrant's transfers and the services on exchange rate development.
Conclusion:
The exchange rate is a variable especially important for Albania. All economic agents,
consumers, business firms, are too sensible in front of changes of the exchange rate. The
importance of this variable on price development in Albania has been proved in many studies
about exchange rate during the transition period. Domestic price of imported goods is strongly
affected by changing of the exchange rate. This article aimed to find the best model that explain
the exchange rate development in our economy and generate more accurate future forecast. The
method used in this article to select between the different models, was the comparison of the
real value of exchange rate and the evaluated value for the next time period. I think that this
method used is sufficient for selecting between the different modes, taking into consideration
that during the last years the exchange rate has been quite stable and in Albania.
The use of a singe linear trend to explain the exchange rate course between lek and US dollar
brought to a big distortion of future forecast of these time series for year 2002. The main
problem with this model with monthly base was that a single linear trend was not appropriate
for explaining all the data observed. The time series between lek and US dollar was proved, as
80
Elido Liko
on later analysis to be, not a trend stationary process, but a difference stationary process. The
future forecast generated by ARIMA model was more accurate and the forecasting error in
absolute term was smaller than in other model.
Since ARIMA model takes into consideration only the present and the past value of exchange
rate time series and the error term, so living apart the influence of important macroeconomic
+variable, in the second step of the analyze, are included - as explanatory variables - same
macroeconomic indicators. Such as the interest rate, the monetary supply, the consumer price
index, the value of exported and imported goods.
The impact of exported and imported goods was study separately based on the feature of our
economy - the imported good volume excess about three times the exported good volume and
the fact that many of imported goods are necessary goods. The factorial model suffered of
multicolinearity. The interest rate and exported goods have the wrong signs. The model in
present stage was not use for generating future forecast, because the presence of high
multicolinearity could bring to serious distortion. The model needs to be improved more in the
future and allow the possibility of including other important variable such as emigrant
remittances and others specific factors for Albania economy.
Exchange Rate Variability and Policy Implication
81
Literature
Ahmet Mançellari; Hasan Mytkolli; Tonin Kola [1999] : Exchange rate and economic transition
Economic research Commerzbank AG [2002]:Economics, interest rate and exchange rates
Selma Xhepa [2002]: Dollarization of Albania Economy an alternative to have in
consideration
Annual report of BoA [2001]
Observation analyze Teuta Baleta;Evelina Çeliku [2000]:The exchange rate market in Albania
Green H.William [1997] : Econometric Analyses
Patric E. Gaynor and Rickey C. Kikkpatic [1994] :Time series modeling and future forecasting
in business and economics
R.Pindyck and D.Rubinfield [1991] : Econometric models and econometric forecasting
Applied time series and Box-Jenkins model [1983]
D.Bails and L.Peppers [1982] :Business flucturation, Forecasting techniques and applicatin
Hall [1994] :Distribution of the estimators for autoregressive time series with a unit root
J.Stock and H.Watson [1988] :Testing for common trends
Suela Thimo
The Increase of Competition:
an Important Factor for a Successful Transition
Introduction
Efficiency allocate is a situation in which are realized all of the possible exchange
profits. The efficiency is a characteristic of the pure competitive markets where a lot of
independent competitors compete each other in order to absorb the costumers.
Democratic nation, whether they have governments of the right or the left, usually have
well articulated policies towards intervention in private industry. Such policies are
designed to promote the efficient allocation of resources through the encouragement of
competition, which is seen as the active progenitor of economic efficiency and welfare.
They are, likewise, employed to limit the losses in efficiency that can arise from the
presence of elements of monopoly.
1. The competition: a challenge for the transition country.
Competition is the engine that makes market economies work. The core of competition
is the existence of sufficiently many sellers independently offering choices, or standing
ready to offer, choices to buyers.
Success thus depends upon efficient production of goods and services that consumers or
business buyer’s want, along with aggressive pricing at levels consistent with efficient
costs. Great success goes to those who risk their efforts and capital to invest in creating
new desirable choices for tomorrow.
But not always competitive maintain the efficiency. There are only a few big companies
created from the competition and rivalry. As a result it is observed a deformation of the
market and inefficiency allocate. The competition often creates between these
companies’ different agreements, (about high prices, separation of the market etc.)
which bring to them many profits.
Thus dominance can be seen to arise where a firm has the power to behave
independently of its competitors and customers, and this may result from a combination
of a number of factors, none of which separately would necessarily imply dominance.
The predictions of economic theory are not sufficiently clear-cut to permit us to
proscribe monopoly outright. Theory does point to a clear suspicion that a lack of
competition can, most certainly, lead to inefficiencies, but it also identifies possible
benefits from the attainment of lower-cost production. An unambiguous policy
recommendation would require evaluation of all these costs and benefits.
A code of competition conduct is especially vital in a nation new to the free market
from of economy and especially in Albania. Under central planning, or in an
encompassing state owned sector, normal acceptable business culture entails discussion,
agreement, and lobbying with respect to collective pricing; rigid and exclusionary
patterns of distribution; and agreements on market allocation. Rivalry is viewed as
wasteful, or at best, peripheral to the workings of the system. The desired norm is
efficiency through agreements that assign roles without needles or divisive overlap such
as agreements that eliminate independent action and choices.
84
Suela Thimo
This is the reason why Sherman, the first antitrust law was invented in U.S.A two
centuries ago.
This law emphasizes the prohibition of deformations of the competition for the big
companies and enables small companies to develop their competition. Even other
countries execute this law, which is modified according to the objectives and their
competition policies. Involvement in the trade economy made this law necessary for the
Eastern and Central Europe countries.
The countries of Eastern Europe share many features of the process of transition to
market economies and also of the evolution of competition, its nature and role. The
interest of economic theory was until now primarily concerned with competition in
well-established market economies. Competition was very limited in the “pretransition” period in ex-socialist countries. The evaluation of competition in these
countries is directly related to their overall progress in the transition towards market
economies.
2. The progress of competition in Albania.
The Albanian competitive law is approve in 1995 and 2 years latter was established an
independent institution as Economy Competitive Directory.
The competition law intends permission protection, and stimulation of competition, so
in this way it helps and stimulates the business and economy development, and to
support the public interest.
This law regulates the activity of independent participants in market through the
determination of the right and their obligations. From analyze of its continent we see
that competitive law is a law with more value. This law is based on the world
experience mainly on that of developed countries, especially on German and EU
experience etc.
What is done in those years for promotion of competitive in Albania?
Is the fact that economic potential for the efficiency increase is not used enough. There
are many objective and subjective reason:
1. One of the key problems, in transition country, unsolved yet is the privatization of big
enterprises in the strategic sector. These enterprises are in monopoly’s position (some of
them as natural monopoles Alb telecom, Albanian energetic corporation) as long as they
are state-owned.
If we consider the case of saving’ s Bank, we see that it has a predominant position in
the most part of the general activity of the bank system.
As the result of these administrative actions in the 1996 and 1997, which brought about
its joining with a part at the network activities of the National Trade Bank and Agrarian
Trade Bank, it gained a predominant position in the bank’s field.
Basing on geographical extension and bank network’s view, the market is deformed and
monopolized by the Saving Bank. This cause the increase of bank’s services, the lack of
new product in the state bank trade etc. and other negative consequences such of the
execution of the policy of the Albanian Bank’s instrument.
The Increase of Competition: an Important Factor for a Successful Transition 85
Table.1 The course of Herfindal index in the years
INDEX H
1994
1996
1997
1998
1999
2000
Optimal value
0.17
0.17
0.13
0.1
0.08
0.08
Total of bilanc
0.60
0.36
0.41
0.51
0.48
0.43
Total of acceptable deposit
0.39
0.40
0.45
0.65
0.57
0.52
Total surplus of credit
0.35
0.32
0.29
0.35
0.28
0.39
Total of treasury bills
0.84
0.92
0.58
0.52
0.81
0.76
Source: The Bank of Albania
Figure 1: The course of Herfindal index in the years
1
0,8
0,6
0,4
0,2
0
optimal value
Total of acceptable deposit
Total of treasury bills
Total of bilanc
Total surplus of credit
Source: The Bank of Albania
As we see in the figure below the present value of Herfindal index are over the optimal level. It
is argued that Albanian bank market is presented as deformed, and has a big concentration. But
in other side we see a reduction of concentration tendency, comparing with 2 last years.
This opposes the competition’s law. In this case this law is not executed because of
powerlessness of the competition sector, long preparation of the Bank in order to be privatized,
and also because of expectation situation that always characterizes the periods before
privatization.
There are the joint efforts of the competition sector, Albanian Bank, the political good will,
privatization necessity etc. that realize the decline of Saving’s Bank power at 40% which is
within the limits permitted by the law.
It is widely known that the privatization is an economic necessity but it is not absolutely sure
that privatization provides the efficiency of the enterprise.
There are private monopoles, which are inefficient, have high management costs and lacks
flexibility.
Monopoly rather than brings benefits for the economy as a result of technological
developments, can cause inefficiencies in the economy as there is no place for free
competition which organizes the material and financial sources that increase the level of
production, quality and employment.
86
Suela Thimo
Their privatization maintaining the monopoly’s position brings about the market’s
domination and damages the competition.
But, there is no other way because this the only possibility to take advantages of scale
economies or to have foreign investors who will invest and guarantee the successful
future of the strategic sector.
In this case the consumers should be protected and the regulatory role of the state
should be strengthened, while ECD should found any small secondary role companies
to increase competition.
2. Until now, ignorance of de facto of ECD, preservation of confidentiality has not
permitted the study of market, in order to observe the power of market companies and
to execute the law. This has been the biggest shortage because one of the main purposes
of the law is the competition’s protection from the increase of power of only few big
companies in the market.
3. After the ECD creation, despite of the difficulties of the first applications of the new
things there are seen extensions and reductions of this directory in a sector, which
cannot provide even the necessary data in order to execute the law because of the other
state institutions. This sector was not anymore an independent institution as it was
predicted in the law, but in fact it was an audition of the Ministry whom it belongs to.
The 2001' s is the year of turning in the competition’s policies field. It is seen an allsided assistance from the world organization, and also a general mobilization of the
Parliament, regulator agencies etc. for considering ECD which is now treated as a
directory by executing this important law.
It can be obviously seen the work that is done from the market companies about the
unfair competition. New experience of price liberalization and privatization made
necessary the legislation’s execution against unfair trade practices.
3. Suggestions about possible methods for the improvement of the legislation’s
execution in the future.
Even though it is done an important change in competition policies it is necessary to
draw attention to some main direction in order to improve the labor in the future.
1. Albanian competition law is a good one, but it still needs a regulation. In this
direction we can mention:
a. One of the law shortcomings is that one which does not forbid the predominant
position with more than 40 % of the predominance of one company or a group of
companies without being interesting in the fact that this companies are valuable or not
in the whole economy. So, one company which has less than 40 % of the market can
apply abusive practices against the competition which is not mentioned in the law,
while a bigger company that has 60 % of the market that does not abuse is efficient and
its existence is worth for the economy, (for example benefits from the advanced
technology, reduction of the expenditures of transaction’s costs etc.)
On the contrary if the competition is not damaged, our new economy needs increasing
productive companies. So, the law must reflect in a better way the development’s needs
of the economy.
b. The law must predict stronger and wider sanctions for its breakers.
c. Law must punish opened and expressed agreement of price fixation, which an
obvious and easily punished, but even those are hidden and silent among the big and
predominant companies of the market. It is necessary a rigorous study of competitive
The Increase of Competition: an Important Factor for a Successful Transition 87
rules of the companies and an invention of the fact if there are silent agreements that
represent damage of competitive.
d. Law must give among the exceptions from its competition like natural monopolies,
different argues about those exceptions for example: if they “improve the production or
the allocation of the goods”, “technical or economic progress”.
2. State should appreciate ECD in order that it can have regular and continues
information about market structures, or enough information in order to calculate with its
specialists the market power.
3. Transformation as soon as possible of ECD in an independent institution from
respective agency, which it belongs to, as in the other countries including even those of
Eastern Europe in order not to be conditioned from the agency but from the Cabinet.
From the last years experience it is necessary to maintain this independent position of
directory.
4.In order to help the competition and the economy, it becomes necessary to supervise
natural monopolies even after their privatization when they abuse with prices, damages
the efficiency via the difference price-cost etc. by putting them obligations for prices.
5. Competition’s law should be executed rigorously, at the moment that the respective
institution is having its right place and is being completed with the right personnel.
4. Factorial analyze of variables that influence in market competition, in Southeast
Europe.
The main purpose of this factorial analyze is to find a model of the relations between the
variables in order to understand better their dimensions of the competition’s
development in those countries. For our purpose we will consider 9 variables for 10
countries of Southeast Europe. Firstly we are analyze those variables for 1993, so in the
beginning of transition (see appendix, table 1). Seeing the results of this analyze (Table
2), we say that 10 variables are dimensioned in 4 factors that explain 84.85 % of
variance.
Table 2: Total variance explained
Initial Eigenvalues
Extraction Sums of Squared Loadings
Compone Total
% of Variance Cumulative
Total
% of
Cumulative
nt
%
Variance
%
1
3.662522
40.69469
40.69469
3.662522
40.69469
40.695
2
1.681883
18.68758
59.38228
1.681883
18.68758
59.382
3
1.172203
13.02448
72.40676
1.172203
13.02448
72.407
4
1.120342
12.44824
84.855
1.120342
12.44824
84.855
5
0.672996
7.477731
92.33273
6
0.443325
4.925831
97.25856
7
0.219252
2.436134
99.6947
8
0.027373
0.304139
99.99883
9
0.000105
0.001165
100
Extraction Method: Principal component Analysis
88
Suela Thimo
The first important factor has a value of 40,695%, which means that about 41 % of
variance is explained by the first factor. The second one is 18.7%, the thirsty is 13.02%,
and the fourth is 12.45%. So basing in this information, the competition is presented
with 4 dimensions. From the Component Matrix(see appendix table 2) we are see, that
in the first dimension are included 5 from the 9 considered variables: export, foreign
investment net per capital, import, index of competition policy and private sector share
in GDP because of the correlation’s coefficient between the variables and the
component.
While in the second component there are included: consumer prices, credit to private
sector, in the third it is included: General government expenditure and in the fourth is
the price liberalization.
Considering the values of correlation’s coefficients and the low percentage, it is obvious
that there is not a clear difference between the factors. We can see this from the 3dimension-graphic which shows the position of the variables (see appendix figure1).
So, in the beginning of the transition the variables looks somehow scattered which
means that competition does not has a single dimension, but different countries have
differences in different ways.
If we would analyze the same variables (see appendix table 3) for 2000, which is a
period of 7 years later, we have almost a better model in which the four dimensions are
cut in three and the first factor
explain the largest part of the variance that is about 41 %.
Table 3: Total variance explained
Initial Eigenvalues
Extraction Sums of Squared Loadings
Total
% of
Cumulative
Total
% of
Cumulative
Variance
%
Variance
%
1
3.688542
40.9838
40.9838
3.688542
40.9838
40.9838
2
1.727514
19.1946
60.1784
1.727514
19.1946
60.1784
3
1.627831
18.08701
78.26541
1.627831
18.08701
78.26541
4
0.908922
10.09913
88.36454
5
0.565577
6.284187
94.64873
6
0.301344
3.348265
97.99699
7
0.113885
1.265388
99.26238
8
0.060365
0.670718
99.9331
9
0.006021
0.066903
100
Extraction Method: Principal component Analysis
Component
This factor includes these variables: credit to private sector, export, general government
expenditure, and import. In the second factor is included: foreign investment net per
capital and the index of price liberalization.(see appendix table 4 and figure 2). In the
2000’s analyze we see that there are changes comparing it with 1993. This difference
can be seen not only graphically but also from the determination of the 3 factors.
We have to stress that still there is some place for improvement in order that variables
that are related with competition can be included in only one dimension. This comes
from a large inferiority that is a result of the centralized system that had concentrated
everything. So in order to resolve this, it is needed time and no doubt big efforts in order
for these countries to have free competition as developed countries.
An appropriate competition policy is designed under the impact of different factors,
such as the existing economic conditions, the effect of various forms of the market
The Increase of Competition: an Important Factor for a Successful Transition 89
structure as a consequence of the character and degree of competition, and the overall
objectives of economic policy.
Thus, the goal of this phase of development in the coming years is to apply a concept
and strategy of development based on the economy and policy of transition; this implies
applying the model of an open economy with the emphasis on domestic and
international competition and export. The key issue in beginning the implementation
relates to the complex of privatization and changing the market structure away from the
concentration of supply.
90
Suela Thimo
Literature
CLAGUE, CHRISTOPHER & C. RAUSSER: The emergence of market economies in Easter
Europe, pp. 187-194.
Commission of the EC [1990]: Industrial policy in an open and competitive environment0.
Brussels.
Different rapport from Economy Competitive Directory and Albanian Bank.
EBRD. [2001]: Annual Report.
“For competitive” Law [1995]: Albania, Nr 8044.
LANG, RIKARD & VOJNIC, DRAGOMIR: Privatization, market structure and competition:
A progress report on Croatia, Zagreb University, pp. 101-130.
MCDONALD, FRANK & DEARDEN, STEPHEN [1992]: European, economic integration.
pp. 59-75.
MORTON, SCOTT [2001]: Competitive strategy. Chicago University.
SCHERER[1996]: The Economics of Industrial Organization.
SWANN, D. [1983]: Competition and Industrial Policy in the European Community.
London,.Methuen.
9.
1.
2.
3.
4.
5.
6.
7.
8.
50
3
4
3
3
3
3
3
3
Croatia
Czech
Fyr
macedoni
Hungary
Poland
Romania
Slovaki
Slovenia
25
45
30
50
45
30
35
2
2
1
3
2
1
2.7
1
2
1
In_com
Price liberalization (pri_lib)
Private sector share in GDP (priv_sec)
Index of competition policy (in_com)
Credit to private sector (cre_pri)
Consumer prices (con_pri)
General government expenditure (gov_exp)
Export
Import
Foreign investment net per capital (fdi)
Source: EBRD
35
3
Bulgaria
40
3
Albania
Priv_sec
Pri_lib
Country
22.1
32.1
10
12.2
28.2
59.3
50.8
47.3
3.7
3.7
Cre_pri
Table 1: The data for 10 country in 1993
32.9
23.2
256
35.3
22.5
338.4
20.8
1512
73
85
Con_pri
46.7
51.3
34.2
50.5
54.6
55.3
41.9
35
48.1
34.9
Gov_exp
APPENDIX
6083
5447
4882
13.6
8.1
1056
13
3904
3727
112
6237
6379
6012
15.9
11.3
1013
13.3
4864
4612
602
export import
55.5
20.18
3.81
15.06
226
0
54.66
22.17
4.7
14.06
fdi
-0.804
-0.191
-1.222
1.111
1.420
0.072
1.298
-1.333
-0.327
-0.025
Fac1
-0.928
-0.897
-0.291
-0.670
-0.301
0.939
1.345
1.699
-1.041
0.137
Fac2
0.586
0.838
-0.858
-0.610
1.209
1.199
-0.801
0.494
-0.342
-1.715
Fac3
0.877
0.849
91
-0.081
-0.191
-1.291
-0.454
1.847
-0.363
0.218
-1.414
Fac4
92
Suela Thimo
Table 2: Component Matrix
Component
1
-0.54615
0.12861
-0.80329
0.532372
0.535887
-0.83437
0.67738
0.456127
0.876795
CON_PRI
CRE_PRI
EXPORT
FDI
GOV_EXP
IMPORT
IN_COMP
PRI_LIB
PRIV_SEC
2
0.650489
0.730133
-0.36161
-0.06596
-0.36197
-0.34088
-0.33012
0.475872
-0.08882
3
0.190543
0.572944
0.249938
0.413553
0.675182
0.188425
-0.04332
-0.28144
-0.04095
Figure 1: Component plot
Component Plot
c re_pri
1.0
con_pri
pri_lib
.5
Component 2
priv _sec
0.0
in_comp
fdi
gov _exp
import
export
-.5
1.0
.5
0.0
Component 1
-.5
-.5
0.0
.5
1.0
Component 3
4
-0.18749
0.288854
0.368201
-0.25442
0.033406
0.324481
0.511054
0.649178
-0.11152
3
3
3
3
3
3.3
3.3
3
3
3
Albania
Bulgaria
Croatia
Czech
Fyr macedoni
Hungary
Poland
Romania
Slovaki
Slovenia
Source: EBRD
Pri_lib
Country
65
80
60
80
70
55
80
60
70
75
Priv_sec
2.7
3
2.3
3
3
2
3
2.3
2.3
17
In_com
Table 3: The data for 10 country in 2000
37
37.6
12
23.6
18.8
11.2
45
23
12.2
3
Cre_pri
8.9
12
45.7
9.8
10.1
9.2
3.9
9.7
9.9
0.1
Con_pri
44.1
45.4
35.1
45.1
42.6
37.8
44.5
47.3
44.5
31.4
Gov_exp
8808
11870
10366
25346
28277
1367
29052
4567
4812
256
export
9947
12786
12050
27466
41422
1968
32183
7771
5988
1070
import
55
381
43.24
116.7
220.28
84.5
434.7
179.8
739.2
41.47
fdi
0.254
0.514
-0.971
1.002
0.997
-1.110
1.343
-0.269
-0.149
-1.611
Fac1
-0.369
0.149
-1.473
0.404
0.120
-0.682
0.536
-0.759
-0.193
2.265
Fac2
93
0.486
-1.033
1.040
0.967
1.305
-0.063
-0.617
-0.681
-1.736
0.332
Fac3
93
94
Suela Thimo
Table 4: Component Matrix
Component
1
-0.2271
0.768901
0.873694
0.377492
0.768589
0.833065
-0.50051
0.518371
0.579634
COM_PRI
CRE_PRIV
EXPORT
FDI
GOV_EXP
IMPORT
IN_COMP
PRI_LIB
PRIV_SEC
2
-0.68988
-0.08463
0.077751
0.017966
-0.27951
0.063948
0.832889
0.035921
0.678849
3
0.317538
-0.20586
0.349569
-0.77892
-0.39795
0.401698
0.134743
0.634594
-0.12297
Figure 2: Component plot
Component Plot
1.0
priv _sec
.5
Component 2
0.0
export
import pri_lib
cre_priv
fdi
gov _exp
-.5
1.0
in_comp
com_pri
.5
0.0
Component 1
-.5
-.5
0.0
.5
1.0
Component 3
Part III:
Research on other Transition Economies
Page
DOBRICZA ANIKÓ:
A Debt Rate Paradox: Why is home financing not as effective as it was
thought to be?
97
DŽENAN DONLAGIĆ:
Monetary Policy In Bosnia and Herzegovina – Currency Board Arrangement
105
ADNAN EFENDIĆ:
Specifics of Transition Process in BiH – Framework of Development
Strategy for BiH
111
Anikó, Dobricza
A Debt Rate Paradox:
Why is home financing not as effective as it was
thought to be?
1. Introduction
The aim of this study is to present the short history and the latest tendencies in home
financing in Hungary, and to point out the potential trash-passes of indebtedness. It will
compare the sinking savings rate with the financial effects of high debt ratios.
2. Tendencies in home-financing before the political changes in 1989
The socialist political system gave priority to the amelioration of the living
circumstances. About 70% of the Hungarian citizens obtained some kind of pecuniary
assistance in those times. Two-third of the aid derived directly from the budget, one
third arrived through various other channels to the households. The large scale of the
aids was still not effective enough. The system preferred the rented flats despite of own
flats. The rents were kept very low, but the building or buying of own flats was difficult.
The lack of building materials was an every-day problem. Typical preferences were
only granted to low comfort flats, luxury living conditions were objected. The principle
of one family-one flat was in the core of the system. The state influenced both the
supply and the demand side of the home market.
The aiding system was relatively complicated and the costs of it were hard to estimate
even for the state budget. Only some periods later was the government able to declare
the calculated costs of the former obligations. This system was very unfair, with high
costs, and caused diversity in the society. For those who were not granted any subsidies
came from the poorest layers of the community. The average income of these people
was about 8% lower than that of the privileged. The living circumstances were 6%
worse of them compared to the preferred groups. In fact, the source for the financial
assistance towards the aided was taken from the poorest through redistribution.
In the 70’s and 80’ home finance debts were granted at a negative real rate. These
credits financed great portion of construction. However, as soon as the inflation reached
two figures, the cost-effects became radical of these loans. In 1989 about 8% of the
GDP was spent on various forms of home-related aids.
From 1990 the diminishing of these grants began: the rate of the old loans was radically
risen, following the higher inflation rates, but the rates were still under real rate. The
debtors could choice: either to pay the higher rates, or to pay back 60% of the loan
immediately with the rest of the loan remitted. Approximately 100 thousand households
chose to pay the higher rates. This caused costs to the budget, because these rates were
still lower than the market rate. The budget of 1995 still contained 42 milliard Forints
obligatory costs connected to the home aiding, which was one-third of the former homeaids.
The tenements were conferred to the local communities, and the aiding of them through
the budget was also stopped. The total value of the aids sank to only 1,6% of the GDP
in 1995.
98
Anikó Dobricza
2.1. A reasonable redistribution
Any governmental aiding system is based on redistribution: transferring resources from
one group to another preferred group of the society. Based on the professional literature,
the criteria to a fair and efficient redistribution are the following:
The first group of the motives are moral. Based on it, those households that have low
income or many dependent children should be granted home aiding. The decision
covers the limit of the income and the relation between the number of children and the
aids. Ethically, the redistribution from every tax-payer (including lower income groups)
towards those better off is unjustifiable. Finally, no ethical explanation can be found to
the preference of hiring to owning flats.
The second group of the motives are economic. There are debates on the fiscal influence
of the home-financing process, whether grants or tax-reduction – or even extra taxes –
are allowed to intervene in the allocation. It can be reasonable though to help the sector
towards better conditions: new home buildings or renovation.
The third group of the motives is the aiming of the redistribution. Examination should
implicate, how direct the selection of the preferred group was.
2.2. The effects of the redistribution
This part examines the redistribution effects on the building, consumption and
insufficiency of homes. For many years, the main problem of the population was the
scarcity of flats. This scarcity was diminished from the supply side from the 70’s and
80’s. The enlargement happened from two sides: through the buildings of state-owned
tenements, and the extension of supports to the private buildings as well. The shortage
in the home sector became a quality, rather than a quantity-problem. The newly built
flats had in most cases of objectionable quality. Few efforts were taken to renovate the
old flats. In consequence of it, the home-wealth of Hungary suffered a diminution of
440 billion Forints, which was 42% of the whole value.
The redistribution – based on false diagnose – could not solve these problems. They
stimulated over-consumption in the home-sector because of the irrationally low rents.
The situation became paradox: the home-consumption of Hungary was higher than its
expected level calculated from the development of the country. However, the subjective
feeling of home-shortage was still there.
After the political changes in 1989, the state-supported home-construction has almost
terminated. Only the higher layers of the society had at last the opportunity to build
own, luxury homes. The bureaucratic hurdles has ceased, so the demand and the supply
both increased. The structure of home-consumption reflected the real, solvent demand.
The former shortage held off, not so because of the extension of supply, but rather of
the diminution of the demand. The costs of building, renting, and even maintaining flats
meant in many case unaffordable costs to households. Now home-ownership depends
on financial circumstances, not on supply any more.
A Debt Rate Paradox […]
99
3. How do financial supports redistribute welfare?
Supports have several redistributive effects. In Hungary, the support system
distinguishes between people living in tenements, and people living in own flats. Before
the political changes, one quarter of the flats were tenements. The state privileged and
favoured the rented flats, and so granted financial advantage to the renters. The owners
of flats had one and a half times bigger flat-connected monthly costs than the renters.
Not mentioning the huge initial building costs. After some time, the disfuncionalties of
the system became more obvious. Pressure arrived from three sides: some part of the
social base of the regime (workers) still lived in own flats, the forces of the political
power wanted to have own flats as well, and thirdly, the market mechanism always
reminded the of the discrepancies of the artificially low rents.
Without the support of the state, there should not be so much difference between the
costs of the two types of flats. In most market economies, the states supports rather own
buildings, and almost never renting, by offering for example tax reduction.
As soon as the pitfalls became obvious, reforms took place. The relative part of the
tenements sector started to drop dramatically after the political changes. After the
privatisation of the tenement sector the tenement rate in all households reached only
about 8%. The privatisation prices of these flats were far under the market price. This
difference was financed from the budget.
Who were the winners, and who paid the price? The privatisation of flats made the
position of the renters even better, the present value of the privatisation gift was higher
than the value of the flat (Dániel [1996]). The owners of the flats paid the price.
Another respect shows, that the higher social classes gained more advantage from the
flat-privatisation, than the lower income classes, because they lacked the necessary
means to pay even the discount price of the immobile. It is morally disapprovable to
make the poor finance the rich, and to help the rich into a favourable situation against
the poor.
Of course, the winner and loser expressions mean only relative position. It is based on
income related data, such as support pro 100 Forints of income, or support pro square
meter in the various income classes.
The first group of the winners was already mentioned: the renters of the tenements, who
gained not only the advantages of the irrationally low rents, but were given privatisation
gifts as well.
Because of the good circumstances, the saving rate in this group was significantly
higher, than in other segments. For many years, investing in immobile was one of the
most attractive and sure opportunities. Many of this group built an own cottage, or
home, or bought an own flat, by still living in low-rents tenements. So they had the
benefit of not only the rent-supports, but also of the discount-rate building credits.
The second group of the winners are the educated layer of the society, mainly because
of there higher income. Winners were the large, low-income families with at least three
children, who enjoyed the social attention of the society. This institution is outmost
favourable in any society.
Anikó Dobricza
100
But who had to pay the price? Those, who were not granted so much support from the
state. Flat support to low income groups, to those living in small villages, to pensioner
and to low educated people was under the average.
After the political changes the low rents were gradually raised. Compared to the
previous years, the portion of the discount to the income fell from 24% to only 8%. The
transition shock made it difficult both for the government to keep the former supports
and for the people to try to make own houses from their own salary.
The market economy liberalised construction as well, which solved the problem of lack
of materials, but also directed the attention to the insufficiency of financial facilities.
One of the main problem areas in the housing sector was the diminution of credits. On
average, credit financing reaches 60-80% of the value of the house, while in Hungary
this rate was only about 10%. The causes came from many aspects. Firstly, investments
in the housing sector fall dramatically: in 1991 only half as many flats were built than in
1980, in 1997 only one third. The financial structure of the housing investments has also
changed. Credit financing almost disappeared, and cash financing became more
relevant.
The motives have two sides. Banks gave loans at high real rates, which was hard to pay
back for any debtor. Secondly, the transition changed the way of thinking of the people,
but this could not happen at once. The old habits of relying on the paternal state had to
disappear and a more adult society had to develop. Besides these, the financial situation
of the people did not get better too quickly. There was a period of adjustment, when
efficiency and market share were the most required feature. Under such circumstances
people did not dare to risk bankruptcy.
The required level of the yearly home-investment should reach 1% of the total value of
the immobile in a country. Analysing the investment levels in Hungary, the value of the
investment always exceeded this margin, and the surface of the new construction was
also slightly over the needed amount.
Table 1.
Year
1991
1992
1993
1994
1995
1996
Total
surface of
the
immobile
(1000 m2)
208 600
215 454
221 029
225 939
225 939
240 197
Newly built
Rate of new
home
buildings surface
surface
in percent of the
(1000 m2) whole immobile
2891
2336
1961
2116
2440
2720
1,39
1,08
0,89
0,94
1,08
1,13
Total value of
the immobile
(Billion
Forints)
Value of the
new buildings
(Billion
Forints9
Rate of the new
buildings value
in percent of the
whole immobile
31317
3646
3914
4655
5556
6973
64,8
64,2
61,8
84,6
125,4
193,4
1,06
1,76
1,58
1,82
2,26
2,77
This study analyses the role of credit in home financing and the rate of home-related
credits to the total value of homes and to the total credits. There are four usual sources
in home financing: cash, income from selling the previous home, credit and support.
The role of the credit among these sources has diminished: from 10 % in 1991 it
reached only 1% in 2000. The reason is that the old credits from the previous regime
A Debt Rate Paradox […]
101
were paid back by pre-instalments, causing contraction of credit. Parallel to this, saved
cash played an ever-increasing role. The supports started at 20% in 1991 and ended at
7% in 2000.
If we analyse the possible causes of the low home-credit ratio, several reasons derive
from the background. The supply side of home finance credits suffered from difficulties
the 1990’s. There were not enough sources for long term credits, and more efficient
areas – among them the budget - siphoned off the money. The company sector has
always had priority against the citizen’s sector because of the uncertain credit risks.
These facts though would not influence the credit offer, if suitable demand could
influence the tendencies.
The demand side, however, has also not been utmost in power. It derives from the
changes of the savings habits of the population, which will be shown in the next
passage. Inflation also causes diminution in credit-demand, and the high real rates are
not tempting for indebtedness.
Since the competition has intensified in the banking sector, which started to reduce the
too high rates, the source of the low home-credit problem must be derived from the
demand side. First, I analyse the income and saving habits, than the dwelling position
and home financing needs of the population.
4. Financial discrepancies
The income of the households has changed disparagingly following the economic
tendencies in the 1990’s: the real income set back. From the year 1997, the real income
of the households started to rise. In 2000 it reached 1,5%, in 2001 6,3%, and in the first
quarter of 2002 the real income increase was 11,5%. This growth enables the
households on one hand to enlarge their consumption and also their savings, and on the
other hand, it builds coverage to credibility. Despite these tendencies, the savings of the
households shrank, and the net financial wealth has not grown at the expected rate. The
cause of it is the suffered loss on stock investment prices. Another reason is the
expansion of consumption. After the years of budgetary restriction in the middle of the
1990’s, there is a natural need in most of the households to recover the deferred
consumption. The major expenditure groups are food (28,6%), maintenance of
dwellings and investment on housing (22,7%), which is more than the half of the
household’s income. These high ratios can also cause precaution towards high housing
debts and instalments.
5. Consequences
The low home investment rates were not tolerable for too long. The government
introduced a comprehensive home-subsidisation system. Recognising the need for low
rate loans, the state gives rate-reduction and social benefits to new home investments.
At the first decision only few households were able to get the loan. Firstly, because
most of them did not fulfil the requirements, and secondly, because they still found the
rates too high. After the modification of the conditions, the population moved towards
the credit. Many thousands of households have already got the loan, and many more
still want to use the opportunity. The question is, whether this high debt ratio can cause
financial trespasses. My opinion is, that many debtors will not be able to pay back their
loans, so it will require more governmental help in the future. This view can be proved
102
Anikó Dobricza
by the low and ever sinking saving rates. This means, that people prefer consumption,
and that they do not see many future goals to save the money for. If the society is used
to spend the income from time to time, this habit is very difficult to get changed. And
lastly, even at discounted rates, the amount paid back over the credit period is twice or
three times more than the value of the house.
A Debt Rate Paradox […]
103
References:
Hegedűs József - Várhegyi Éva: A lakásfinanszírozás válsága a kilencvenes években.
(Home financing crisis in the 1990’s)
Közgazdasági szemle XLVI. February 1999. (101-120. o.)
Dániel Zsuzsa: Lakástámogatás és társadalmi újraelosztás. (Dwelling-support and social
redistribution) Közgazdasági szemle, XLIV. October 1997 (848-877. o.)
Árvai Zsófia – Menczel Péter: A magyar háztartások megtakarításai 1995 és 2000
között (Households savings between 1995 and 2000.)
Közgazdasági szemle XLVIII. February 2001. (93-113. o.)
Bodewig: Eine moderne Wohnungspolitik hat soziales Profil. (A modern home-politic
has social profile) BMVBW, 11 June 2002.
Stephen Malpezzi: The implications of Urban Research for Real Estate Finance in
Developing and Transition Economies. University of Wisconsin, 19 December 2000.
Jan Krause: Immobilienwirtschaft als Element der Systemtransformation der
Volkswirtschaft, (Immobile-economy as an element of systemtransition of the
Economy) Technical University, Gdansk, 2001.
Dženan Donlagić
Monetary Policy in Bosnia and Herzegovina – Currency
Board Arrangement
Introduction
The main motive for choosing the topic “Monetary policy in Bosnia and Herzegovina –
currency board arrangament” is actual position of the Central bank of Bosnia and
Herzegovina and the link of bosnian monetary mechanizm through fixed foreign
currency exchange between Convertible mark (KM) and German mark (DM) in
currency board arrangament. On 1.01.1999. euro becomes common currency of EMU.
Having this in mind we have got indirect link of our currency to euro from 1st . January
1999 (1KM = 1DM = 0,51129EURO). Direct link of Convertible mark and euro starts
from 1.01. 2002 by introducing in circulation euro as common currency in euro-zone
countries. Considering actual needs of the state Bosnia and Herzegovina within the
region and having the need to be the part of EU in economic domain, as well as in
monetary mechanism, would require clearly defined plan in the future.
The main hypothesis is that currency board arrangament, for our situation the best and
current functioning institutional solution, represents the basis for achieving the stable
currency project what would ensure addditional power in fastening the process of
monetary integration of the Central bank of Bosnia and Herzegovina through regional
approach towards long-term goal accessing EMU and becoming the member of ECB.
The open question in monetary policy sphere in Bosnia and Herzegovina is what after
currency board arrangament, or continue with it?
1. The Establishment of the Central bank of Bosnia and Herzegovina in the
framework of actual institutional solution
According to Dayton Law of Constitution of Bosnia and Herzegovina the Central bank
of Bosnia and Herzegovina has been established as the only authorized institution for
implementing monetary policy at the whole of Bosnia and Herzegovina. The Central
bank of Bosnia and Herzegovina (later on CBBiH) is the bank at state level of Bosnia
and Herzegovina that started its work on 11th August 1997. After the establishment of
the CBBiH, National bank of Bosnia and Herzegovina and National bank of Republic
Srpska have stoped operations as central banks.
The concept of monetary policy has been determined according to the principles of
currency board arrangament. Therefore according to the Article III in the Law of
Constitution the monetary policy is under authority of the state Bosnia and
Herzegovina.1
Authority of central bank will be determined by assembly of the state’s parliament.
However, in the first six years (1997-2003), the central bank would not be able to offer
loans by issuing money and in that sense would function as currency board. After this
period of time assembly of state’s parliament may decide to give CBBiH functions of
1
“The Law of Constitution of BiH: Annex 4 general peace agreement in BiH.
Dženan Donlagić
106
typical central bank.2 Defined position of CBBiH in this manner, that functions as
currency board arrangament, really narrows functions of central bank and sets it in the
first six years period more like technical-operational mechanism rather then the
institution that operates in creative way in monetary policy sphere, especially in area of
money and credits.3
The law of CBBiH4 defines main goal of CBBiH, and that is maintaining the stability of
domestic currency, Convertible mark, that is issued under currency board arrangament.
The above stated law defines the principles of currency board as follows:
-
New currency– Convertible mark (KM) is linked to euro at fixed exchange rate
1KM = 0,51129 euro. This exchange rate is determined by the Law of the CBBiH.
International standard code for Convertible mark is “BAM”, or numerical code 977.
CBBiH may issue in circulation Convertible mark only if it provides 100% reserves
in convertible foreign currencies. ( approximately 95% is in euros and 5% other
currencies).
CBBiH cannot give credit to any sector. It means that it cannot finance the
government and it cannot be the lender of last resort.
2. Functioning of currency board arrangament in Bosnia and Herzegovina
Monetary policy in Bosnia and Herzegovina based on the principles of currency board
arrangament encompasses the following:
-
full coverage of monetary liability of CBBiH by its net foreign reserves,
fixed exchange rate with euro 1euro = 1,95583 KM as reserve currency,
unlimited convertibility of KM in euro and vice versa following the fixed exchange
rate mechanism.
At the same time it is stated by the Law that CBBiH may not be involved in open
market operations at money market nor capital market and may not give any credits to
any sector, including banking as well as government sector.
2.1 Why currency board in Bosnia and Herzegovina and not the central bank?
Often asked question from the sphere of monetary policy is why currency board in the
monetary system in Bosnia and Herzegovina, and not a typical central bank? Having
said this we naturally find the question in the country why it is proposed, according to
Dayton Law of Constitution, the central bank functioning through the currency board
arrangament for the six years period meaning from 1997 until 2003? For this solution
we may find more reasons whereby we state the following5:
•
2
As the country that started the process of transition towards the market oriented
economy it is very important to have macroeconomic stability and within it one of
the key factors is stable currency,
See: S. Kreso: “Novac Bosne i Hercegovine”, Jež Sarajevo, 1997, pg. 30-31
See: S. Kreso: “Novac Bosne i Hercegovine”, Jež Sarajevo, 1997, pg.132
4
The Law of Central Bank BiH, Official Gazzette 1/97.
5
For more details see: S. Kreso: “Novac Bosne i Hercegovine”, Jež Sarajevo,1997, pg.137
3
Monetary policy in BiH – Currency Broad Arrangement
107
•
As the country that came out of the war with deep trauma, divisions and mutual
untrust we would have great dificulties in defining the goals of CBBiH, if it has to
implement discretional monetary policy. Due to that rigid and automatic rules as
currency board follows was the best solution to start the process of economic and
monetary integration in the whole country,
•
As the country that is economically devastated we could hardly follow the
reasonable framework of “discretional” policy of central bank and “break” the
boundaries due to huge needs of the money in the process of reconstruction and
redevelopment of the economy as well as for public expenditure. Strong pressure in
the way of financing budget’s needs by issuning more money would surely lead to
high inflation what would create strong negative effects on economic social
development.
Monetary policy of CBBiH based on currency board rules is being followed for four
years already and results are summarized below:
-
Maintaining consistently stability of the currency (Convertible mark - KM);
Maintaining the rate of inflation at around 4% per year;
Managament of official foreign currency reserves held by CBBiH according to the
instructions from Governing Council so that its investment is done in secured
manner and with optimal interest earning;
Established cooperation with institutions in Bosnia and Herzegovina;
CBBiH has led the process of payment system’s reform in the country whereby now
it is done by commercial banks and runs smoothly (giro clearing and RTGS system);
CBBiH, in currency board arrangament, is one of the key factors to have stable
economy and developing self-sustainable bosnian economy. This is based mainly on
stable Convertible mark that ensures further development of healthy and stable financial
system in Bosnia and Herzegovina.
The stable and strong financial sector is precindition for strenghtening whole economic
development (production growth, increased employment, growth of export, economic
growth and national income growth), what would enable Bosnia and Herzegovina the
realization of the european integration process with the long-term goal to become the
member of EU and integration of CBBiH in euro system and ECB. The currency board
arrangament would continue to act in maintaining stability of the bosnian currency.
Therefore currency board in Bosnia and Herzegovina has justified its goal. Justification
is proven by KM stability, trust by citizens in KM, and maintaining minimal rate of
inflation.
Finally functioning of our central financial institution in currency board arrangament
will positevely influence future development and more effective functioning of
macroeconomic policy while ensuring faster accession in european monetary
integrations.
3. Continue with currency board arrangament in Bosnia and Herzegovina?
Since its establishment CBBiH implents the monetary policy through currency board
arrangament. Bearing in mind situtation that Bosnia and Herzegovina had been in the
past decade we may say that there was not better solution in implementing monetary
108
Dženan Donlagić
policy. Currency board arrangament according to Dayton Law of Constitution will last
until august 2003. The question that arises here is whether the CBBiH will continue to
function under principles of currency board and certain period of time after 2003. The
answer stated here is taken from the speech by Mr. Peter Nicholl, governor of CBBiH,
where it follows 6:
-
there is wide spread support to continue with currency board arrangament due to the
fact that it has ensured one of the basic stability’s element what citizens of Bosnia
and Herzegovina earlier did not have;
it would be risky to change it. The trust in KM would decline because citizens
would be waiting to see how alternative monetary policy would function;
currency board arrangament functions well in few countries in Europe such as
Estonia, Litvania and Bulgaria; currency boards become acceptablei, even
“modern”;
long-term goal of monetary policy in Bosnia and Herzegovina is to get closer
bosnian economy to EU. Convertible mark is already linked to euro. Therefore it
would have sense to keep this link.
Since currency board arrangament is very important monetary “weapon” for the
transition country as it is Bosnia and Herzegovina different theoretical questions on
future development perspectives of CBBiH remain open, but practically currency board
would remain for certain period time in the future. It depends what would the
Parliement of Bosnia and Herzegovina decide in august 2003.
4. Conclusion
Since its establishment CBBiH implents the monetary policy through currency board
arrangament. Bearing in mind situtation that Bosnia and Herzegovina had been in the
past decade we may say that there was not better solution in implementing monetary
policy. Currency board arrangament according to Dayton Law of Constitution will last
until august 2003. Since currency board arrangament is very important monetary
“weapon” for the transition country as it is Bosnia and Herzegovina different theoretical
questions on future development perspectives of CBBiH remain open, but practically
currency board would remain for certain period time in the future. It depends what
would the Parliement of Bosnia and Herzegovina decide in august 2003.
European Union, is as the result of economic integration, successfully implemented and
monetary integration. It means implementing common monetary policy by European
central bank that issued in circulation common currency euro on 1st January 2002 in all
12 countries members of economic and monetary union.
Bosnia and Herzegovina, as European country, has long-term goal, and that is to go
towards European monetary integration. Bosnia and Herzegovina has become 44th
member of Council of Europe on 24th April 2002 and that is the first initial step in longterm process of integrating bosnian monetary system in monetary system of EU.
Having the link of bosnian currency with Euro is the chance for our country to move
further in taking all necessary steps and reforms in realizing long-term goal. It is
important to say that link between KM and euro from 1st January 2002 through currency
6
His argumets regarding this question governor P.Nichol has presented in lecturing postgraduate class at
Economics Faculty Sarajevo, June 2001.
Monetary policy in BiH – Currency Broad Arrangement
109
board arrangement is not “shortcut” for entering economic and monetary union. It is
needed to reach stable economic growth and self-sustainable development, create single
economic market, establish institutional infrastructure for functioning of financial
market, synchronize fiscal and monetary policy, create safe legal framework for
attracting investmets from EU countries and implement in many aspects standards
required by EU.
110
Dženan Donlagić
5. Bibliography
KRESO, SEAD (1997): “Novac Bosne i Hercegovine”, Sarajevo (Jež).
CENTRAL BANK OF BOSNIA AND HERZEGOVINA (1999): “Annual report”.
CENTRAL BANK OF BOSNIA AND HERZEGOVINA (2000): “Bilten br.2”.
CENTRAL BANK OF BOSNIA AND HERZEGOVINA (2000): “Bilten broj 4”.
CENTRAL BANK OF BOSNIA AND HERZEGOVINA (2000): “Tri godine currency
board-a”.
CENTRAL BANK OF BOSNIA AND HERZEGOVINA (2000): “Generatori inflacije
u Bosni i Hercegovini”.
Adnan Efendić
Specifics of the Transition Process in BiH –
Framework of Development Strategy for BiH
1. Introduction
The commands economy and social ownership have not withstood the historic battle
with private ownership. The historic error made will be rectified in the process of
transition. This is very complex dynamic process that will enable the return of private
ownership, the development of new infrastructure, a more efficient market and the
democratic institutions appropriate to a multi-party parliamentary democracy.
In the paste decade, countries in transitions have seen very different trends in macroeconomic performance. Transition in Bosnia and Herzegovina is an integral part of the
overall process of transition. BiH, like all other transition countries (there are 27 of
them in Europe) started that process in 1989. Initial liberalization has been completed,
transition recession was dominant for first two-three years, and then later,
macroeconomic stabilization has been reached. But, there is a historic fact, which has
changed BiH transition process and put this process away from the ''ordinary'' scenario –
it is four years war. The war left its own mark, so these reformes have seen a complete
turnaround from the situation at the outset. After the war, BiH government decided to
start/continue the process of transition.
Economic growth in BiH has been large in quantitative terms, while the quality of the
growth is not satisfactory. The achieved results in terms of the establishment of selfsustainable economy are weak. The major source of growth remains largely dependent
on the flow of international aid. The unemployment rate has been reduced, although it
is still intolerable as it is around 40%. The export ability is weak, while a balance of
payments deficit is continually high, from one year to another. The private sector
participates in GDP with around 35%, which is too small a percentage in comparison to
other countries in transition.
2. Some aspects of the transition process in BiH
There are specific characteristics of BiH's economic transformation compared to the
other countries in transition, since the country restarted from ruins caused with
conflicts. Thanks to foreign donors, infrastructure has been significantly reconstructed,
and macroeconomic disorder has been removed to a significant extent.
''During the reconstruction period i.e. 1996-1999, around US$ billion 3,5 provided by
international donor community was spent on reconstruction of the country.
The following results were achieved with these funds:
• Over 90 % of roads are in good condition
• Electric power generation achieved 80 % of prewar level
• Water-supply achieved 90 % prewar level
• In FBiH over 30 % and in RS 15 % of housing was repaired
• Relatively free flows of goods throughout BiH has been ensured, etc.''
[Council of Minister BiH, 2001, S.6]
Adnan Efendić
112
But, as international donor community withdraws, BiH will face the problem of lack of
foreign exchange funds, which is, given large trade deficit and high level of foreign
indebtedness, of critical importance. Country's financial system is based exclusively on
banks in which population does not have confidence, thus large portion of funds stay
out of financial system. Therefore foreign direct investments are more than welcome to
BiH.
Although the reconstruction stage of Bosnia and Herzegovina is mainly completed,
economy is still in the phase of incomplete transition towards market economy. A low
level of production, collection of revenues, exports and investment activities make this
country dependent from the official international assistance. Under the conditions of
engagement of the Currency Board1 this is the only way of covering fiscal and external
imbalance with which Bosnia and Herzegovina is being faced.
Macroeconomic stabilisation in the country has been achieved only partly. However,
there are some indications that the revival of economy and the progress has been
achieved along with the risk of making national income dependent on the flow of
pecuniary assistance. High growth rates over the past years have been partly supported
by foreign assistance – donations, unilateral transfers and not by private investments –
the so-called aid driven GDP. The correlation of GDP growth and the flow of
international assistance to BiH are shown in Figure 1.
Figure 1: GDP growth and financial aid flows to BiH
Chart 1 GDP Growth and Financial Aid Flows
1,600
in % (right)
in US$ million (left)
100
90
1,400
80
1,200
70
1,000
60
800
50
600
40
30
400
20
200
10
0
0
1996
1997
1998
Priority Reconstruction Assistance
1999
2000e
GDP Growth
Source: A report on implementation of the world banks country assistance strategy
As we can see, there is very strong positive correlation between financial aid flows and
GDP growth rate. Economic growth was maybe high over these five years, but what is
more important, it was not a good quality growth, because:
•
•
•
1
Poverty grows
Inequality grows
Unemployment grows
Currency Board represents a manner in which the BiH Central Bank operates until 2003
113
Specifics of the Transition Process in BiH [...]
It is not good sing. It is not big step from traditional towards modern society.
Also, if we look other aspects of transition, we will not fined better results. Evolution of
current course of transition shows very bad position of BiH economy.
Table 1 gives review of key economic indicators of BiH economy.
Table 1: BiH: key economic indicators, 1999
Employment
(1989 =100)
37,6
Unemployment
rate
(%)
39,1
Foreign-trade
balance
(bill. US$)
- 1,44
Net foreign
debt/export
(%)
203
Total foreign
debt/GDP
(%)
68
Source: EBRD 2000, Transition Report
Based on table 2, it can be concluded that in BiH, there are:
•
•
•
•
•
Very low employment of labor force (employment has reached only 37,6 % of
prewar employment, while in South-European economies in transition in 1998 it
was 77,1 %, and in Central European economies in transition 87,4 %. There is no
economy in transition with lower employment than BiH.)
Huge unemployment of labor force (there is no economy with higher unemployment
rate; average unemployment rate for South-European economies in transition is 16,6
%, and for Central-European economies in transition 12,5 %);
Huge foreign-trade deficit (there is no single other country with such relatively high
deficit), which is not decreasing, on the contrary, increasing;
Huge foreign indebtedness (ratio between total foreign debt and GDP is 68 %, while
South-European average is 40 %, and Central-European average 111 %).
Very poor creditworthiness (ratio between net foreign debt and export is 203 %,
while South-European average is 111 %, and Central-European 108).
Table 2 provides review of achieved level of economic reforms in BiH.
Table 2: Achieved reform level in BiH, 2000
BiH
SETE
CETE
Private sector
share in GDP (%)
35
59
72
Enterprise
restructuring
1,67
2,22
3,07
Competition
policy
1,00
2,00
2,93
Banking
2,33
2,78
3,40
Capital
market
1,00
1,78
3,01
Source: EBRD. Transition Report 2000.
SETE: Albania, Bulgaria, Croatia, Macedonia, Romania; CETE: Check Republic, Hungary, Poland,
Slovenia, Slovakia.
Ranking index: 1 (lowest level) to 4+ (highest level).
Based on the table 3 it can be concluded that in BiH:
•
•
•
•
Private sector development is very low
Extremely slow enterprise reform due to slow privatization, poor restructuring
and poor corporative management.
Undeveloped competition policy
Extremely slow privatization
Adnan Efendić
114
•
Poor developed banking sector
Also, there is no overall macroeconomic stability in BiH. More precisely, fiscal stability
is a big problem, since there are significant budget deficit (in year 2000 they amounted
officially around 3 % of GDP BiH). Prices are pretty stable – inflation is about 4 % a
year. Central bank BiH has established as ''Currency Board'' – main reason for monetary
stability in the country. These facts are the reality, but we have to keep in mind that BiH
faces with huge problems. The most difficult problems are:
•
•
•
•
Development of government system
Return of refugees
Reconstruction of country
Transition
3. Development strategy for BiH
As we have seen in the first part of the presentation, BiH economy is facing with a lot
of problems. It was the reason that BiH government has started to build development
strategy for BiH, which will try to solve crucial problems of the economy. They
established mid-term strategy – 2000-2004 – under the name ’’Entrepreneurial society –
Bosnia and Herzegovina Development Strategy Global Framework 2000-2004’’. It was
published in May 2001. Also, it is base for new document, which will provide to solve
the problem of poverty in BiH – PRSP program – Poverty Reduction Strategy Paper
that is now in progress. Bosnia and Herzegovina Development Strategy Global
Framework 2000-2004 (hereinafter: the EDSGF) based on broad understanding of
development. Development is understood as transformation of society, movement from
traditional towards modern society. Illustratively said, the EDSGF is a frame of
composition of development strategy.
4. Priorities of development strategy for BiH
We will present the objectives of ’’Entrepreneurial society” for the period 2000-2004
and priorities for their achievements.
Table 3: Development priorities of ’’Entrepreneurial society”
Level of priority
AAAa
AAAb
AAa
AAa
AAb
AAb
A
♦
♦
♦
♦
♦
♦
♦
Priority
Employment increase
Institution building
Capital mobilization
Acceleration of economic sector transition
Completion of reconstruction process
Non-production sector development
Housing development
Source: Council of Ministers BiH, Entrepreneurial society – BiH economic development strategy
Global Framework 2000-2004
Note: ranking is digressive from AAAa, through AAAb, etc. to A.
115
Specifics of the Transition Process in BiH [...]
5. Development engines - EDSFG
EDSFG gives very strong importance to five development engines for economic
improvement:
1. Foreign direct investments - it would be extremely important that foreign trade
and direct foreign investments cover whole BiH, rather then only certain
enclaves.
2. Education – education is from long-term prospective of crucial importance for
economic development. It trains people how to learn, to accept and conduct
transformation of society.
3. Entrepreneurship– entrepreneur is focus of atention of EDSFG. Also, in the
comparable group of countries (Greece, Portugal, Austria) small firm is a key
word in services, industry, crafts-work and agriculture.
4. Export – Bah lost foreign and even domestic market. These results with deficits
of current payment balance, and leads worsened situation with foreign debt,
which presents significant cause of short-term instability and severe long-term
development constraint. It would be of particular importance to develop strategy
of entering foreign markets, with focus on markets, which can realistically be
entered.
5. Regions – certain regions of BiH could become production, investment and
export platforms of South-East Europe, in sense that BiH could become host to
transnational corporations, which could use BiH export platforms to perform
certain productions, which would cover the needs of the whole region.
6. Strategy implementation policy
As strategy implementation policies EDFSG sees:
1. Fiscal policy – reform of State and Entity institutions would be necessary first of
all. Then audit and control of all budgets in the country would bee necessary, as
well as adjustment of public expenditures to fiscal capacity of the economy. Fiscal
policy has to be based on firm compliance with stand-by arrangement rules and
adjusting public expenditures with tax capacity of the economy.
2. Monetary and credit policy – the Central bank BiH would be developed in the
following direction (it is Currency board arrangement now): development of
monetary-credit instruments, developing banks credit capacity, developing
internal payment system.
3. Foreign economic policy – harmonization of registration policy for foreign
investments on BiH level and Entity level in the sense of maximal simplification
of the procedures and location where it can be done; to continue concluding
bilateral agreements and investment insurance; to promote local economy abroad,
market analysis and support for export enterprises through reform and training.
4. Transport policy – recovery and stabilization of transport on prewar level as well
as undertaking institutional and political reforms of transport sector.
5. Competition policy – enterprise restructuring in post privatization period also
presents on of the steps towards strengthening competition both in local and
international market. Without its strengthening and reduction of activities related
to political rent-seeking activities, particularly in the area of import, it would be
difficult to expect larger progress.
116
Adnan Efendić
6. Environmental policy – development mast be based on maintenance of biodiversity and natural resource for next generations. Short term oriented
development base on air, water and soil pollution would not be acceptable.
Before conclusion, we will look the expectations of EDSGF for period 2000-2004.
Table 4: Expectations of EDSGF document for BiH 2000-2004
2000
2001
2002
GDP
5.333 6.262 7.090
GDP growth (%)
14
14
10
GDP per capita
1.274 1.448 1.678
GDP per capita growth (%)
13
13
9
Gross domestic investments (% GDP)
32
32
28
Savings (% GDP) with grants
15
17
18
Savings (% GDP) without grants
14
16
18
Public expenditures (% GDP)
48
47
44
Public revenues (% GDP)
31
35
36
Public deficit (% GDP)
- 17
-13
-11
Export
1.816 2.162 2.498
Import
2.863 3.124 3.234
Current account balance
- 879
-831
- 640
Net-foreign direct investments
162
185
200
Net-long term loans
117
190
146
Foreign debt
3.348 3.629 3.819
Debt servicing
136
115
151
2003
7.731
6
1.762
5
26
19
19
43
37
-7
2.796
3.358
-504
200
144
3.954
178
2004
8.386
5
1.833
4
25
20
20
42
38
-5
3.044
3.460
-424
200
96
4.063
191
Source: Council of Ministers BiH, Entrepreneurial society – BiH economic development strategy global
Framework 2000-2004
7. Conclusion
After all we can conclude that even in the case that BiH will have a good
macroeconomic management, population will not have a standard of life measured in
terms of per capita GDP in 2004 compared with 1989.
Bosnia and Herzegovina is the country in transition, but also the country in postwar
reconstruction. It is very difficult to promote strategy in the environment like this one –
strategy that should help to avoid all those problems and in the same time to reach selfsustainable development.
BiH is quickly moving towards better future. Almost all levels in the state have
prepared strategic document for economic development and restructurings that will
enable to make positive steps in the future. The State and Entity levels have adopted
strategy for economic development and these days they are working on final stage of
operative strategy paper document for reduction poverty in BiH – PRSP document.
As we could see through this presentation, expectations for BiH economy are not very
optimistic one, but they are positive. Bosnia and Herzegovina slowly, but strongly, goes
’’up’’ and towards Europe – European Union. We hope, that one-day – but very soon,
BiH will be an integral part of European integration.
117
Specifics of the Transition Process in BiH [...]
8. Literature
CENTAR ZA MENADŽMENT I INFORMACIONE TEHNOLOGIJE. [1996]:
integracija određuju budućnost BiH. Sarajevo.
Transformacija i
COUNCIL OF MINISTERS BIH, MINISTRY OF FOREIGN TRADE AND ECONOMIC RELATIONS.
[2001]: Entrepreneurial society – Bosnia and Herzegovina Economic Development
Strategy Global Framework 2000-2004. Sarajevo. (Macroeconomics strategy).
DANIELS, P.W. [1996]: The global economy in transition. London.
EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT. [1999]: Transition report
1999. London. (Annual report).
EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT. [2001]: Transition report
2001. London. (Annual report).
INGRAM, JOSEPH K. [2001]: A report on implementation of the World Bank’s country
assistance strategy. Brussels. (Statement).
118
Adnan Efendić
9. Appendix
Table 5: BiH - Key indicators, 2000
Population (mill)
Age distribution
Expected life time
Area (square km)
Terrain
Extreme altitude
Sea cost
Climate
Land by use
Irrigation (square km)
Natural resources
Natural risks
Source: CIA. The World Fact book 2000
3.835.777
0-14 years: 20 %
15-64 years: 71 %
65 years and over: 9 %
71,49 (male 68,78; female 74,38)
51.129
Mountain/valley
0 m (Adriatic Sea) i 2.386 m (Maglić)
20 km
Hot summers and cold winters; mountain regions with
short cold summer and long severe winters; along sea
cost moderate rainy winters
Arable lend (14%),
Cultivated (5%),
Pastures (20%),
Forests (39%);
Other (22%)
20
Coal, iron ore, bauxite, magnesia, forests, copper,
chrome, lead, zinc, hydro-power
Destructive earthquake
121
ORGANIZERS
PROF. DR.
HEINZ-DIETER WENZEL
Head of the Chair of Public Finance, and
Dean of the Faculty of Social Sciences and Economics
Bamberg University (Germany)
Email: [email protected]
PROF. DR.
AHMET MANCELLARI
Head of the Economics Department
Faculty of Economics
University of Tirana (Albania)
Email: [email protected]
PROF. DR.
DIETMAR MEYER
Professor
Department of Macroeconomics
Budapest University of Economic Sciences and Business
Administration (Hungary)
Email: [email protected]
CONFERENCE DIRECTOR
DR. VOLKER TREIER
Scientific Assistant
Chair of Public Finance, Department of Economics
Bamberg University (Germany)
Email: [email protected]
CHAIR
PROF. DR.
MICHAEL SCHMID
Head of the Chair of International Economics
Department of Economics
Bamberg University (Germany)
Email: [email protected]
PARTICIPANTS
DOBRICZA ANIKÓ
Ph.D. Student
Department of Finance and Accounting
Széchenyi István University of Győr (Hungary)
Email:[email protected]
ARJETA ABAZI
Ph.D. Student
Economics Department, Faculty of Economics
University of Tirana (Albania)
Email:[email protected]
122
Participants
DR. LÁSZLÓ BALOGH
Associate Professor
Department of Finance
Budapest University of Economic Sciences and Business
Administration (Hungary)
Email: [email protected]
DORIANA DERVISHI
Ph.D. Student
Economics Department, Faculty of Economics
University of Tirana (Albania)
Email: [email protected]
DŽENAN DONLAGIĆ
Senior Assistant Lecturer
Faculty of Economics
Sarajevo University (Bosnia-Herzegovina)
Email: [email protected]
ADNAN EFENDIĆ
Ph.D. Student
Faculty of Economics
Sarajevo University ((Bosnia-Herzegovina))
Email: [email protected]
MICHAEL EICHINGER
Ph.D. Student
Chair of International Management, Department of
Business Administration
Bamberg University (Germany)
Email: [email protected]
ERMELINDA FEJZULLA
Ph.D. Student
Economics Department, Faculty of Economics
University of Tirana (Albania)
Email: [email protected]
ARSENA GJIPALI
Ph.D. Student
Economics Department, Faculty of Economics
University of Tirana (Albania)
Email: [email protected]
GUNTHER GRATHWOHL
Ph.D. Student
Chair of International Economics, Department of
Economics
Bamberg University (Germany)
Email: [email protected]
STEFAN HOPP
Ph.D. Student
Chair of Public Finance, Department of Economics
Bamberg University (Germany)
Email: [email protected]
Participants
123
LÁSZLÓ HORVÁTH
Ph.D. Student
Department of History and Economic Thought
Budapest University of Economic Sciences and Business
Administration (Hungary)
Email: [email protected]
HOLGER KÄCHELEIN
Ph.D. Student
Chair of Public Finance, Department of Economics
Bamberg University (Germany)
Email: [email protected]
ZSOMBOR LIGETI
Ph.D. Student
Department of History and Economic Thought
Budapest University of Economic Sciences and Business
Administration (Hungary)
Email: [email protected]
ELIDA LIKO
Ph.D. Student
Economics Department, Faculty of Economics
University of Tirana (Albania)
Email: [email protected]
BORBÁLA SZÜLE
Ph.D. Student
Institute of Finance
Budapest University of Economic Sciences and Business
Administration (Hungary)
Email: [email protected]
SUELA THIMO
Ph.D. Student
Economics Department, Faculty of Economics
University of Tirana (Albania)
Email: [email protected]
Dr. Volker Treier
Chair of Public Finance,
Bamberg University
[email protected]
Conference Director
Prof. Dr. Dietmar Meyer
[email protected]
Prof. Dr. Ahmet Mançellari
[email protected]
Prof. Dr. Heinz-Dieter Wenzel
Head of Chair of Public Finance, and
Dean of Faculty of Social Sciences and Economics,
Bamberg University
[email protected]
Organizer
Responsible for the Scientific Programme
and the Local Organization:
sponsored by
More detailed city map at
http://www.tourismus.bamberg.de
How to get there:
Highway A70, drive BambergHighway A73, drive Memmelsdorf
Location of Seminar:
Feldkirchenstraße 21
Room F130
City Map
Bamberg University
04.06. - 06.06.2002
Room F130
Seminari Evropian i Disertantëve
në Ekonomiks
Európai Doktorszeminárium
Europäisches
Doktorandenseminar Economics
(EDS)
Seminar Program:
Papers with discussion
Chair: Ahmet Mançellari
Heinz-Dieter Wenzel
Opening
Godehard Ruppert
(Rector of Bamberg University)
Welcome address
Volker Treier
Seminar Concept
Opening
Tuesday, June 04, 2002
14.00
14.15 –18.00
14.15
15.00
15.45
16.30
17.15
Guido Heineck
Does religion influence the labour
supply of married women in Germany?
Zsombor Ligeti
The validity of the Kuznets "invertedU" hypothesis in Hungary after
transition
Stefan Hopp
Selected pieces of the economic theory
of J.-B. Say, or: Economics today:
Rhetoric or science?
Arsena Gjipali:
Emigration and its economic
consequences in the transition phase of
Albania
Dorjana Dervishi
The Balkan region economies and the
challenge of integration
8.30 –12.15
Papers with discussion
Chair: Michael Schmid
Wednesday, June 05, 2002
8.30
9.15
10.00
10.45
11.30
Individual and / or cultural program
Suela Thimo
Competition strengthening, an
important factor for a successful
transition in Southeast Europe
Dzenan Donlagic
Monetary policy in BiH - currency
board arrangement
Adnan Efendic
Specifics of transition process in BiHframework of development strategy for
BiH
Elida Liko
Exchange rate variability and policy
implications - the case of Albania
Gunther Grathwohl
Structural macroeconomic
characteristics of developing countries
Afternoon
9.00
9.00 –12.00
Michael Eichinger
International alliances - an approach of
a trust-based management
Papers with discussion
Chair: Volker Treier
Thursday, June 06, 2002
9.45
Ermelinda Fejzullahu
Critical assessment of the IMF
structural adjustment programs
10.30
11.15
13.30 –16.30
13.30
14.15
15.00
15.45
17.00
Holger Kächelein
Fiscal competition on the local level:
May commuting be the source of
financial crises?
László Balogh
Growth stimulating tax systems
Papers with discussion
Chair: Dietmar Meyer
Anikó Dobricza
The debt rate paradoxon – Why isn’t
home financing as effective as it was
planned to be?
Arjeta Abazi
Transmission mechanism of the
monetary policy - the case of Albania in
transition
László Horváth
The Keynesian and the Post-Keynesian
approach to distribution – similarities
and differences
Borbála Szüle
The structure of the Hungarian pension
funds market
Final discussion
BERG Working Paper Series on Government and Growth
1.
Mikko Puhakka and Jennifer P. Wissink, Multiple Equilibria and Coordination Failure in
Cournot Competition, December 1993
2.
Matthias Wrede, Steuerhinterziehung und endogenes Wachstum, December 1993
3.
Mikko Puhakka, Borrowing Constraints and the Limits of Fiscal Policies, May 1994
4.
Gerhard Illing, Indexierung der Staatsschuld und die Glaubwürdigkeit der Zentralbank in
einer Währungsunion, June 1994
5.
Bernd Hayo, Testing Wagner`s Law for Germany from 1960 to 1993, July 1994
6.
Peter Meister and Heinz-Dieter Wenzel, Budgetfinanzierung in einem föderalen System,
October 1994
7.
Bernd Hayo and Matthias Wrede, Fiscal Policy in a Keynesian Model of a Closed Monetary Union, October 1994
8.
Michael Betten, Heinz-Dieter Wenzel, and Matthias Wrede, Why Income Taxation Need
Not Harm Growth, October 1994
9.
Heinz-Dieter Wenzel (Editor), Problems and Perspectives of the Transformation Process in
Eastern Europe, August 1995
10. Gerhard Illing, Arbeitslosigkeit aus Sicht der neuen Keynesianischen Makroökonomie,
September 1995
11.
Matthias Wrede, Vertical and horizontal tax competition: Will uncoordinated Leviathans
end up on the wrong side of the Laffer curve? December 1995
12. Heinz-Dieter Wenzel and Bernd Hayo, Are the fiscal Flows of the European Union Budget
explainable by Distributional Criteria? June 1996
13. Natascha Kuhn, Finanzausgleich in Estland: Analyse der bestehenden Struktur und
Überlegungen für eine Reform, June 1996
14. Heinz-Dieter Wenzel, Wirtschaftliche Entwicklungsperspektiven Turkmenistans, July
1996
15.
Matthias Wrede, Öffentliche Verschuldung in einem föderalen Staat; Stabilität, vertikale
Zuweisungen und Verschuldungsgrenzen, August 1996
16.
Matthias Wrede, Shared Tax Sources and Public Expenditures, December 1996
17. Heinz-Dieter Wenzel and Bernd Hayo, Budget and Financial Planning in Germany,
February 1997
18. Heinz-Dieter Wenzel, Turkmenistan: Die ökonomische Situation und Perspektiven
wirtschaftlicher Entwicklung, February 1997
19. Michael Nusser, Lohnstückkosten und internationale Wettbewerbsfähigkeit: Eine kritische
Würdigung, April 1997
20.
Matthias Wrede, The Competition and Federalism - The Underprovision of Local Public
Goods, September 1997
21.
Matthias Wrede, Spillovers, Tax Competition, and Tax Earmarking, September 1997
22. Manfred Dauses, Arsène Verny, Jiri Zemánek, Allgemeine Methodik der
Rechtsangleichung an das EU-Recht am Beispiel der Tschechischen Republik, September
1997
23. Niklas Oldiges, Lohnt sich der Blick über den Atlantik? Neue Perspektiven für die aktuelle
Reformdiskussion an deutschen Hochschulen, February 1998
24.
Matthias Wrede, Global Environmental Problems and Actions Taken by Coalitions, May
1998
25. Alfred Maußner, Außengeld in berechenbaren Konjunkturmodellen – Modellstrukturen
und numerische Eigenschaften, June 1998
26. Michael Nusser, The Implications of Innovations and Wage Structure Rigidity on
Economic Growth and Unemployment: A Schumpetrian Approach to Endogenous Growth
Theory, October 1998
27.
Matthias Wrede, Pareto Efficiency of the Pay-as-you-go Pension System in a ThreePeriod-OLG Modell, December 1998
28. Michael Nusser, The Implications of Wage Structure Rigidity on Human Capital
Accumulation, Economic Growth and Unemployment: A Schumpeterian Approach to
Endogenous Growth Theory, March 1999
29. Volker Treier, Unemployment in Reforming Countries: Causes, Fiscal Impacts and the
Success of Transformation, July 1999
30.
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31. Andreas Billmeier, The Early Years of Inflation Targeting – Review and Outlook –,
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32. Jana Kremer, Arbeitslosigkeit und Steuerpolitik, August 1999
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Matthias Wrede, Mobility and Reliefs for Traveling Expenses to Work, September 1999
34. Heinz-Dieter Wenzel (Herausgeber), Aktuelle Fragen der Finanzwissenschaft, February
2000
35. Michael Betten, Household Size and Household Utility in Intertemporal Choice, April
2000
36. Volker Treier, Steuerwettbewerb in Mittel- und Osteuropa: Eine Einschätzung anhand der
Messung effektiver Grenzsteuersätze, April 2001
37. Jörg Lackenbauer und Heinz-Dieter Wenzel, Zum Stand von Transformations- und EUBeitrittsprozess in Mittel- und Osteuropa – eine komparative Analyse, May 2001
38. Bernd Hayo und Matthias Wrede, Fiscal Equalisation: Principles and an Application to the
European Union, December 2001
39. Irena Dh. Bogdani, Public Expenditure Planning in Albania, August 2002
40. Tineke Haensgen, Das Kyoto Protokoll: Eine ökonomische Analyse unter besonderer
Berücksichtigung der flexiblen Mechanismen, August 2002
41. Arben Malaj and Fatmir Mema, Strategic Privatisation, its Achievements and Challenges,
January 2003
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Borbála Szüle, Inside financial conglomerates, Effects in the Hungarian pension fund
market, February 2003
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European Doctoral Seminar (EDS), February 2003
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