Chapter 8: Economic System (2)

An average of 47 percent of the budgetary expenditures in the 1960-67 period was devoted to investment, with annual fluctuations of this category between 39 and 55 percent. The lowest rates of investment occurred in 1962 and 1963 as an aftermath of the abrupt cessation of Soviet aid deliveries. In absolute terms the volume of investment increased from 1.1 billion leks in 1960 to 1.8 billion leks in 1967. Total investment for the years 1966-70 was planned at 6.5 billion leks, an increase of 34 percent over investments in the preceding five-year period. Actual investment in the years 1966-69 was reported to have exceeded the plan for those years by 12 percent. In line with the Party's policy of promoting a rapid growth of the country's productive capacity, from 80 to 82 percent of the investment has been devoted to the construction of facilities for material production.

Industry has received the largest share of investment--48 percent in the 1961-65 period and 50 percent under the plan for 1966-70. On an annual basis, industry's share ranged from a low of 36 percent in 1962 to a high of 61 percent in 1965. The proportion of agricultural investment was much lower--only 15 percent of the total in 1961-65 and less than 19 percent of the total planned for 1966-70. During the first two years of the 1966-70 period, actual investment in agriculture lagged substantially and amounted to only 11.7 and 16.2 percent, respectively. The lack of adequate investments has been a contributing cause of poor agricultural performance. There has been no consistency in the pattern of industrial and agricultural investment. The respective shares of these two sectors in total investment fluctuated widely from year to year in the 1960-67 period. An adequate explanation of the reasons for this fluctuation has not been found.

Investment in housing and for social and cultural purposes has been minimal--8.1 and 3.7 percent, respectively, in the 1961-65 period and 6.1 and 8.1 percent, respectively, under the plan for 1966-70. As in the case of agriculture, actual investment in 1966-67 was substantially below the planned levels and amounted to less than 5 percent for housing and 2 percent for social and cultural needs. This capital starvation has been largely responsible for the dismal housing situation and for the inadequacy of other essential amenities.

Money and Banking

The lek, divided into 100 quintars, is a nonconvertible paper currency with multiple official exchange rates. The basic official rate since August 10, 1965, has been 5 leks for 1 United States dollar, a rate that has no applicability in practice. Up to 1965 the exchange value had been 50 leks per US$1. The change in par value had no economic significance because prices, wages, and all other monetary values were reduced by the same ratio.

There are two types of so-called tourist or support leks. A rate of 12.50 leks per US$1 applies to the official exchange of Western currencies by nonresidents and to support payments received by residents from Western sources. A rate of 7.55 leks per US$1 applies to the exchange by Communist country residents of their national currencies and to support and other noncommercial payments transferred by them from Albania to Communist states. A third variety of official exchange rates consists of the rates used to balance clearing accounts under special trade and payments agreements with Communist countries. An illegal black market rate of about 60 leks per US$1 from early 1968 through early 1969 was reported by reliable sources.

All currency matters are administered by the National Bank jointly with the ministries of finance and trade. Albania is not a member of the International Bank for Reconstruction and Development or of the International Monetary Fund.

Adequate information is not available on the nature of the relationship between the State Bank and the Ministry of Finance or on the bank's financial operations beyond some outdated statistics on credits and savings deposits. As the principal financial institution, the State Bank carries out the financial policies of the Party and government. It issues currency, provides credit to all economic sectors, accepts savings deposits, and serves as the country's treasury. In addition to these functions, the State Bank helps prepare the financial plans for the economy, is called upon to assist enterprises in completing their planned assignments, and is responsible for controlling all economic activities through the use of its financial levers.

In mid-1969 the State Bank was severely criticized for poor performance, particularly its failure to exercise adequate control over unauthorized use of funds and waste of materials by the enterprises it helped to finance. The bank's failure was largely precipitated by uncertainties created through a decentralization of economic authority, decreed by the Party, and a dilution of the bank's control function.

A specialized system of state savings and securities banks was established within the Ministry of Finance in November 1968, for the purpose of mobilizing the population's savings for investment through loans to the state and the sale of its securities. The text of the law that created this institution contained no provision concerning the relation of these new savings and securities banks to the State Bank. Further information on the new banks was not available in mid-1970.

The only available information on the State Bank's financial operations consists of partial data on loans to agriculture and for housing and on the number and amount of savings deposits. The total volume of farm credits, exclusive of credits to state farms for which statistics have not been published, increased from 95 million leks in 1960 to 252 million leks in 1964, including long-term loans of 38 million and 44 million leks, respectively. By 1967 long-term loans had increased to 56 million leks. The statistics do not indicate whether the published data refer to the annual volume of loans granted or to the total amount of outstanding loans. A small fraction of the loans after 1960 was granted to individual peasants for the purchase of livestock.

Loans for housing construction and repair declined drastically from 17 million leks in 1960 to only 7 million leks in 1964. The distribution of the loans between urban and rural areas fluctuated widely, but urban loans predominated by a large margin and constituted from 69 to 93 percent of the total. The number of savings accounts increased from 235,400 in 1960 to 445,000 in 1968, and the volume of deposits rose from 119 million to 247 million leks. Interest paid on these amounts totaled 3.6 million and 4.8 million leks in the respective years, which implies a reduction of the interest rate from about 3.0 to 2.5 percent.

FOREIGN ECONOMIC RELATIONS

Foreign Aid

The country's foreign economic relations have been conditioned by its leadership's economic goals and political persuasion. As a poor, undeveloped country intent on modernizing and expanding its economy at a rapid pace, Albania has had to rely heavily on foreign economic and technical assistance during the post-World War II period. The leadership's extreme Marxist orientation and hostility toward the Western nations have precluded a recourse to non-Communist sources of aid and have made the country entirely dependent upon contributions by other Communist states. But even within the Communist sphere political disagreements have had a disruptive effect on aid arrangements (see ch. 6, Government Structure and Political System).

From 1945 to 1948 economic and technical assistance was received from Yugoslavia. After the political break between that country and Albania, the Soviet Union assumed the role of major aid donor, and smaller contributions were made by some of the East European Communist states. Since 1961, when the substantial support of the Soviet Union was lost in the wake of the political schism within the Communist world engendered by the Sino-Soviet dispute, Albania has been able to obtain assistance only from the People's Republic of China (Communist China). The readjustment necessitated by the abrupt withdrawal of all Soviet aid and technical advisers was said by Albanian leaders to have retarded economic development by three years.

The extent of aid received in the form of long-term loans, some of which became grants through debt cancellations, is only partially known. The amount of total loan commitments by the Soviet Union in United States dollar equivalents for the period of 1945 through 1961 was estimated by one Western source at US$246 million. Another Western source reported the amount of loans promised by the Soviet Union and the East European Communist states for the 1961-65 period to have been in excess of US$132.5 million. These loans were cancelled in their entirety in the spring of 1961. A partial list of Soviet loan commitments, compiled by a Western student from Soviet economic literature, totaled US$172 million for 1957-61. The actual amount disbursed, however, was much smaller.

Aid deliveries, as reflected in official Soviet statistics, totaled only US$39.4 million for the years 1955-61. Similar information on aid deliveries from 1949 to 1954 was not readily available. Western observers believe that the economic crisis created by the Soviet withdrawal of aid forced Albania to default on the outstanding loans.

Loans granted by East European Communist states and outstanding in 1965 (in terms of United States dollar equivalents) were given by a Soviet source as follows: Bulgaria, US$11 million; Czechoslovakia, US$25 million; East Germany, US$15 million; and Romania, US$7.5 million. Information about repayments of these loans was not available. Only a fraction of the outstanding amounts could have been liquidated through Albania's trade surplus with these countries. Some Western estimates placed the debt to the Soviet Union and East European Communist states at the end of 1968 at a minimum of the equivalent of US$500 to US$600 million.

Economic aid by Communist China dates back at least to late 1954. Stated in United States dollar equivalents, Albania received in that year a grant-in-aid of US$2.5 million and a loan of US$12.5 million. An additional credit of US$13.75 million was made available in early 1959, and a loan of US$123 million for the purchase of industrial equipment during the Third Five-Year Plan (1960-65) was extended in early 1961, after Albania's break with the Soviet Union. Two more loans, for undisclosed amounts, were negotiated in June 1965 and November 1968 to finance the fourth and fifth five-year plans, respectively. In public references to the 1968 loan, Party and government officials gave the impression that it was substantially higher than the loan of US$123-million obtained in 1961. Aid has been provided by Communist China free of interest.

A Western scholar reported unidentified sources to have suggested that the 1965 loan amounted to about US$214 million, a sum substantially in excess of the credits granted up to that time. Another Western source estimated total direct credits for the 1960-68 period to have been more than US$450 million, exclusive of substantial grants. Yet, other Western sources thought at the time, and also in 1970, they had discerned evidence of disappointment on the part of the leadership with the extent of the financial assistance, delays in the supply of machinery, and an unwillingness or inability to supply much-needed consumer goods. The leadership's awareness of the inadequacy of foreign aid in relation to the planned development program has been evidenced, in its appeals for greater productivity, by the high frequency of references to the Party's principle of reliance on the country's own efforts and in its continuing campaign for the utmost economy of resources.

The country's cumulative clearing debt to Communist China on the commodity trading account at the end of 1968 was estimated at roughly US$300 million. This amount did not include the substantial additional costs of assistance in the form of technical advisers who have guided the construction and operation of major industrial projects. Estimates of these costs or of the number of aid technicians in the country were not available.

Foreign Trade

Because of the dearth of domestic resources in relation to the needs for economic development and consumption, foreign trade has consistently shown a negative balance. A marked improvement in this respect has taken place since 1955, even though the absolute deficit has been growing with the rising trade volume. In the 1960s exports covered 60 percent or more of imports, compared with 47 percent in the 1956-60 period and 31 percent in the preceding eleven post-World War II years. This improvement in the trade balance has been achieved through a consistent policy of diversifying domestic production with a view to import substitution, developing all possible resources for the production of exportable goods, improving product quality, and severely restricting domestic consumption. The annual trade deficit in 1967 and 1968 was about 200 million leks.

The volume of trade has been rising quite steadily from 140 million leks in 1950 to 950 million leks in 1968. During this period imports increased from 110 million to 580 million leks, and exports rose from 30 million to 370 million leks. The Fourth Five-Year Plan calls for an increase of 31 percent in total trade over the volume of the preceding five years, including an increase of 36 percent in exports and 28 percent in imports. These figures imply a planned average annual trade volume in the 1966-70 period of 885 million leks, of which 355 million leks were exports and 530 million leks imports. Although the rate of trade expansion during 1966-68 exceeded the target, the export-import ratio was not as favorable as that called for by the plan.

The directional pattern of the country's foreign trade has conformed to the general observation that trade follows aid. The assumption by Communist China in 1961 of the major aid donor position previously held by the Soviet Union had an immediate and pronounced impact on the direction of trade. In 1960 Communist China accounted for only 7 percent of the total trade volume, as against 54 percent for the Soviet Union. By 1962 trade with Communist China had grown to 51 percent of a somewhat smaller total volume, whereas trade with the Soviets had ceased altogether by 1963. In 1964 Communist China's share of the trade was equal to that of the Soviet Union in 1960, and the actual volume represented by that share was 23 percent larger. During the 1962-68 period trade with Communist China amounted to about half the total trade volume, but the share of Communist China declined below that level toward the end of this period. This decline was the result of a successful effort by the leadership to expand the country's trade with both Communist Eastern Europe and the non-Communist West.

Trade with the Communist countries of Eastern Europe, other than Yugoslavia, continued after the break with the Soviet Union and increased by 66 percent from 226 million leks in 1960 to about 375 million leks in 1968. The share of this group in total trade rose during this period from 35 to 40 percent, almost entirely after 1964. Albania's most important trade partner in this group has been Czechoslovakia, second only to Communist China with a volume of 118 million leks in 1968, equivalent to about 12 percent of Albania's total trade volume in that year. Following Czechoslovakia in order of importance were Poland, East Germany, and Bulgaria, with trade volumes ranging from 69 million to 53 million leks. Trade with Hungary and Romania amounted to about 40 million leks and 32 million leks, respectively. With the exception of Poland and Romania, Albania's trade balance with the countries of Eastern Europe was positive between 1960 and 1968. The excess of exports over imports during this period totaled about 65 million leks.

During the early years of the country's dependence upon Soviet aid, trade with non-Communist countries and with Yugoslavia had been discontinued, but it was resumed on a very small scale by 1955. In 1964 this trade amounted to only 65 million leks (equivalent to US$13 million at the official rate of exchange), or 8 percent of the total trade turnover. Fully two-thirds of this trade was accounted for by Italy and France. During the following four years trade with the West and Yugoslavia increased 2-1/2 times to 160 million leks in 1968, and the share of this trade in the total turnover doubled.

Italy continued to be the major Western trade partner, with a turnover of 66 million leks in 1968, but the largest advance was made in the trade with Yugoslavia. The total trade turnover with that country rose fiftyfold in one year, from 400,000 leks in 1965 to more than 20 million leks in 1966. Under the 1970 trade agreement the trade volume is scheduled to reach 50 million leks. In 1968 Italy and Yugoslavia together absorbed four-fifths of the combined exports to the West and Yugoslavia and supplied more than half the imports from that area.

Another striking example of the country's trade expansion effort is the agreement with Greece, a country with which Albania has had no political or economic relations for thirty years. Signed by the chambers of commerce of both countries in January 1970 and effective for one year, this agreement provided for an initial turnover of 7.5 million leks, of which 4 million leks were in imports and 3.5 million leks in exports. Commercial orders worth about 1.5 million leks on both sides were reported to have been placed by mid-1970.

In 1969 trade relations were officially reported to have been maintained with forty different countries. Relations with thirteen of these countries, both Communist and non-Communist, were formalized by trade agreements.

Imports have overwhelmingly served the needs of production and industrial expansion. Almost 50 percent of the imports in 1964 consisted of machinery, equipment, and spare parts. More than 23 percent was accounted for by minerals and metals, chemical and rubber products, and construction materials. Another 16 percent was made up of agricultural raw materials, about two-thirds of which was destined for the food-processing industry. Only 11 percent of the imports consisted of finished consumer goods and ready-to-eat foods. Continuing Party and government emphasis on increasing production and the improved domestic output of foods suggests that the production-oriented nature of imports did not change significantly by 1970.

Exports have consisted predominantly of minerals and mineral products but have also included significant amounts of agricultural products and manufactured consumer goods. In 1969 petroleum and natural bitumen, chromium and ferronickel ores, and copper (including copper wire), constituted 55 percent of exports. Another 25 percent comprised processed foods, such as canned fish and vegetables and preserved fruits; light industry products, including cotton and linen textiles and some readymade clothes; and a few chemicals. The balance of 20 percent was represented by fresh fruits and vegetables and by agricultural raw materials, such as hides and skins, tannins, and medicinal plants. Exports of fruits and vegetables to central and northern Europe have been growing rapidly.

The share of manufactured and semiprocessed products in exports was also officially reported to be increasing and to have constituted 51 percent of the export volume in 1968. Students of Albanian affairs have reported that some of the country's exports are not competitive in world markets and that Communist China has been willing to absorb them at a good price only for political reasons, as did the Soviet Union before 1961.