3. Overview: Identifying strategic opportunities for Albania

Abstract

Since its independence, Albania has achieved significant success across various social, economic and institutional dimensions. It became a democratic society with a functional open market economy. Productivity growth across all sectors has improved employment, incomes and standards of living. To address its development constraints and embrace a durable, sustainable and inclusive growth path, Albania needs a long-term vision. This chapter takes a holistic view of Albania’s development performance across a range of outcomes, spanning the breadth of the Sustainable Development Goals. It then outlines key strategic opportunities to help Albania improve the quality of life for all citizens, strengthen education and skills, find new sources of growth, build local government capabilities, broaden the revenue base, address air pollution, and respect diversity.

Over the last 30 years, Albania has made remarkable progress in becoming a democratic society with a functional open market economy. Productivity growth across all sectors has improved employment, incomes and standards of living. While deprivations remain, extreme poverty is very low and life expectancy is increasing. Institutional development and global integration also progressed. Albania’s accession to the European Union is a cornerstone of Albania’s foreign policy and a key driver of reforms.

Building on its success, Albania must now create the capabilities for continued strong development. Gross domestic product (GDP) and productivity growth rates have declined since the global crisis of 2008 and have not recovered, indicating that the early gains from the post-communist transition have been achieved, and new engines for a sustainable model of development must be built. Stronger institutions, with the capacity to implement and deliver quality public services to all citizens, will be key, as will be the process towards further integration towards the European Union.

To succeed, Albania is preparing a new Strategy for Development and Integration 2021-2030. This strategy comes at a crucial time, as the accession process with the EU has moved to a new level, while Albania, Europe and the world grapple with the COVID-19 pandemic and its aftermath. Building on the previous National Strategy for Development and Integration 2014-2020 (Republic of Albania Council of Ministers, 2013[1]), the new strategy will have to lay out a vision for Albania in 2030, chart the path and key objectives for achieving this vision and tackle the most important constraints that can hold Albania back.

The Multi-dimensional Review (MDR) of the Western Balkans supports Albania and the region with a strategic perspective and ideas for action on shared challenges. This assessment of Albania is intended to support the new strategy. It provides inputs for a possible vision for Albania’s development and identifies the key constraints that must be tackled in order to achieve sustainable and equitable improvements in well-being and economic growth. The next phase of the project will focus on peer learning to find solutions to the challenges that emerge from the initial assessments as shared across the region.

This overview chapter presents the main results of the initial assessment of development in Albania. First, the chapter presents inputs for a development vision for Albania for 2030, elaborated by participants of a strategic foresight workshop. Second, the chapter takes a bird’s-eye view to assess Albania’s development performance on the basis of key statistics on well-being and the sustainable development goals (SDGs) and summarises the key constraints to development identified in this report. It concludes by suggesting key strategic directions for the future. Given the global impact of COVID-19, this overview is followed by a special chapter on the impact of the pandemic in Albania. Chapter 5 contains the full assessment of Albania along the pillars of sustainable development: People, Prosperity, Partnerships and financing, Peace and institutions, and Planet.

Whenever relevant and subject to data availability, Albania is compared to a set of benchmark economies in the region (Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia), the Organisation for Economic Co-operation and Development (OECD) (Costa Rica, Czech Republic, Greece, Slovak Republic, Slovenia and Turkey), the European Union beyond the OECD (Croatia and Romania) and other countries (Kazakhstan, Morocco, Philippines and Uruguay). It includes regional averages for the Western Balkans and OECD and EU members. The selection of benchmark economies is based on historical similarities (including integration into the European Union), economic structures, geographical proximity and mutual partnerships. The selection of non-OECD economies is based on their similar economic and social challenges (such as high migration rates), shared history as transition economies and the relevance of development trajectories that can bring an additional perspective to Albania and other Western Balkan economies and create valuable learning opportunities across selected areas.1

This report benefited from close collaboration with the Government of the Republic of Albania, especially the Department for Development and Good Governance of the Office of the Prime Minister (OPM), and from the collaboration and comments of multiple OECD Directorates and the financial and collaborative support of the Swedish International Development Cooperation Agency, which is gratefully acknowledged.

Towards a vision for Albania in 2030: an attractive society with high quality of life and strong human capital, built on reliable, resilient and efficient institutions, a dynamic economy and integration into Europe and the region

A clear vision of the desired future state of Albania is an important guidepost for a national development and integration strategy. A vision for a strategy should provide a description of what Albanians expect from the economy, society, institutions and the environment and what the most important elements are in each domain. To generate inputs for such a vision, a workshop entitled Albania: Vision and Challenges 2030 was organised in Tirana on 6 February 2020, gathering a broad range of participants from various public-sector ministries and agencies, the private sector, academia and civil society. The vision was built on the basis of simple narratives of the lives of future citizens of Albania and subsequent clustering by the five pillars of sustainable development: People, Prosperity, Partnerships and financing, Peace and institutions, and Planet.

The narratives proposed for the vision highlighted aspirations for good quality of life, health and education, and employment and broad economic opportunity, green spaces and returnees to Albania. The narratives of the workshop evoked young women with high education – some in high-skilled professions, such as engineering and information technology (IT) analysis, others in entrepreneurship, tourism or agro-business. Many have returned with experiences from abroad and are now exploring opportunities in Albania. All fictional citizens enjoy middle-class family lives, with stable, decent work, good health and quality education. Citizens have houses and enjoy leisure time in green, clean public spaces. Digitalised services, quality jobs and an economic environment conducive to starting company and improving skills for career development were also emphasised.

The resulting inputs for the potential vision centre on strong education and governance, the rule of law and a dynamic and regionally integrated economy as the main levers for higher well-being. Box 3.1 presents the vision statements for Albania in 2030 prepared by participants. Anchored in the European Union, Albania of 2030 is envisioned as an economy with stable, reliable and accountable institutions and a functioning system of checks and balances. It has a competitive economy with an attractive framework for business and growth thanks to higher productivity, a skilled labour force and better use of natural resources. Last, Albania of 2030 is a knowledgeable and inclusive society that benefits fully from improved health and education systems and quality jobs and where human capital and well-being are at the heart of the country’s development. In terms of the individual dimensions of this vision, education, good governance, strong institutions and public services are considered the most important, as identified through a voting exercise (Figure 3.1).

Box 3.1. A potential development vision for Albania in 2030

Albania of 2030: an attractive society with high quality of life and strong human capital, built on reliable, resilient and efficient institutions, a dynamic economy and integration into Europe and the region.

As part of the OECD strategic foresight workshop organised in Tirana on 6 February 2020, participants developed a vision statement that reflects the desired future for Albania in 2030.

People

A society with well-being (higher standards of living) through improved health system, enhanced equality and equity of education, better quality jobs, and assured social justice.
Community integrated social services that optimise human capital.

Prosperity/Partnerships and financing

Albania is a competitive economy with sustained economic growth and a leading role in the region. Its economy is based on strong and dynamic small and medium-sized enterprises (SMEs) and is attractive to foreign investors. Albania has developed and secured markets (financial, capital and human).
The economy is characterised by macroeconomic stability and inclusive growth, higher investments and capital, efficient use of natural resources, increased capacity and importance of human resources, attractive climate for foreign investments, digital economy and labour mobility for higher productivity.

Peace and institutions

A participatory democracy remains crucial to human rights, social justice and rule of law. Checks and balances mechanisms enable stable, accountable and reliable institutions at all levels, with increased focus on local governments. Effective institutions ensure a merit-based public administration. It is always better to prevent than to punish.
All citizens enjoy their political, social, economic and cultural rights through accountable, democratic governance.

Planet

Albania is integrated into the EU economic and infrastructure system. It is a diverse and competitive economy in the Western Balkans. It assures equal access to infrastructure, economy and knowledge, protects cultural, natural and historical heritage and is an attractive destination.

Figure 3.1. The most important dimensions of the vision for Albania: education, good governance and public service provision

Assessing Albania’s development performance

Building on the proposed vision, well-being around the world and sustainable development as benchmarks, this section reviews Albania’s development performance. The proposed vision emphasises well-being and sustainable development as the ultimate objectives of development. To assess the well-being of Albanian citizens, the OECD’s Well-being Framework uses a mix of objective and subjective indicators across a range of dimensions that matter to people (OECD, 2020[2]) (Box 3.2). A version adapted to the realities of emerging economies compares Albania to the level of well-being outcomes expected given its level of GDP per capita, across ten dimensions covering material conditions, quality of life and relationships. In a second step, this section assesses Albania’s performance across the five pillars of the SDGs, applying distance-to-target measures across selected indicators and building on the analysis in the main body of this report.

Albanian citizens are comparatively satisfied with their housing conditions and feel comparatively safe when walking alone at night. The poverty rate is relatively low, and life expectancy at birth is relatively high. However, there are warning signs in other well-being dimensions, such as income, work and job quality, social connections and empowerment (Figure 3.2). For instance, in 2019, three in ten Albanians said that they had no friends or family to count on in times of need, and Albanians rated current life satisfaction at 5, on average, on a scale of 0 (not at all satisfied) to 10 (completely satisfied).

Figure 3.2. Current and expected well-being outcomes for Albania: worldwide comparison

Box 3.2. Measuring what matters to people

As part of its broader Better Life Initiative, the OECD first created its Framework for Measuring Well-being in 2011 with the aim of putting people at the heart of policy making. This represented the culmination of longstanding work both inside and outside the organisation. Important strides to “go beyond GDP” had been made with the United Nations Development Programme’s (UNDP) Human Development Index and the work on multidimensional poverty by the Oxford Poverty and Human Development Initiative. The framework also draws on rich academic literatures in welfare economics and capability theory, the recommendations of the Commission on the Measurement of Economic Performance and Social Progress (Stiglitz, Sen and Fitoussi, 2009[10]), and existing well-being and sustainable development measurement practice in OECD member and non-member countries. Since its launch, the work on well-being has continuously been updated in line with best practice and continues to be published in the OECD’s “How’s Life?” report series (OECD, 2020[2]). For the purpose of the MDRs, the OECD Well-being Framework has been adapted to fit the realities of countries at different stages of development (Boarini, Kolevi and McGregor, 2014[11]).

The adapted OECD Well-being Framework used in this report focuses on living conditions at the individual, household and community levels that capture how people experience their lives “here and now”. Current well-being here is comprised of ten dimensions related to material conditions that shape people’s economic options (Income, Housing and infrastructure, Work and job quality) and quality-of-life factors that encompass how well people are (and how well they feel they are), what they know and can do and how healthy and safe their places of living are (Health, Knowledge and skills, Environmental quality, Life evaluation, Safety). Quality of life also encompasses people’s connectedness and engagement (Social connections, Empowerment).

Methodological considerations

To capture the full range of people’s actual life experiences, the OECD Well-being Framework uses both objective and subjective indicators. For instance, the Health dimension not only looks at life expectancy estimations but also considers how people feel about their health status and the health services they are receiving. Subjective indicators are sometimes viewed as not being as robust as objective measures; however, there are at least three reasons for considering them alongside the latter to get a holistic picture of well-being. First, there is solid methodological evidence that the subjective measures contained in the well-being framework (e.g. life satisfaction, trust in others and government) are statistically valid and correlate with objective measures of the same construct (OECD, 2017[12]; OECD, 2013[13]). Second, even in cases where perceptions diverge from objective reality, they capture the reality of survey respondents and can drive real-world outcomes, such as voting and lifestyle behaviours (Murtin, Fleischer and Siegerink, 2018[14]). It can actually be especially illuminating for policy makers to zoom in on areas where the gap between citizen perception and objective indicators is largest. Third, many of the measures typically considered objective and routinely used in policy analysis, such as household income, are based on people’s self-reports and can equally be affected by response biases and non-response rates (e.g. of very wealthy households).

There are differences in well-being between men and women in Albania, and this report finds that there is scope to improve women’s equal participation in society (Figure 3.3). As in most countries around the world, women in Albania have a higher life expectancy than men and are more socially connected (OECD, 2020[2]). Although women’s employment outcomes do not lag significantly behind international benchmarks, Albania is far from achieving gender equality in the labour market. Some 46.9% of the female population over age 15 is in employment, compared to the OECD average of 49.9%. Gender gaps in formal employment are particularly high for women in their childbearing years: in 2018, the employment rate for women aged 25 to 29 was 54.1%, accounting for a gender gap of about 19.3 percentage points. The figures are significantly higher, on average, in OECD countries: 68% and 14.5 percentage points. Family responsibilities, discouragement and lack of access to child care are key reasons for women’s lack of participation in the formal labour market. Indeed, Albanian women spend more than six times more time on unpaid household chores than men, compared to around two times more in comparable regional economies, such as Serbia, and the OECD average (see the People section in Chapter 5).

The well-being analysis highlights gender differences in safety and empowerment. Albanian men are more likely to feel safe when walking at night in their neighbourhoods (Gallup, 2020[15]). While this is not surprising (men in every OECD country feel safer than women), there are indications of prevailing gender norms that normalise violence against women: 30% of Albanian women consider a husband to be justified in hitting or beating his wife for trivial reasons, such as burning food, going out without telling him or refusing sex, compared to 8%, on average, in OECD economies. There are gender differences in civic engagement. Male citizens are more likely to voice their opinions to an official, and although one in three parliamentary seats is occupied by a woman, there remains a step to reach parity. A preference for male heirs, rapidly declining fertility rates and sex-selective abortions have skewed the birth sex ratio: 111 boys born for every 100 girls – one of the highest in the region (see the People section in Chapter 5).

Figure 3.3. Current and expected well-being outcomes for Albania: gender differences

Sustainable development: summary of Albania’s performance and major constraints

To set the basis for future strategy, this section summarises the constraints analysis of this report for each pillar of sustainable development.

People: Albania is doing well on a number of SDG targets, particularly life expectancy and extreme poverty (Figure 3.4). At 78.6 years, life expectancy at birth is the highest in the Western Balkans and higher than in the United States (75.5 years). Standards of living have improved, and various promising social protection and healthcare reforms have recently been undertaken.

Challenges remain with regards to vulnerability, inequality, skills and social services. Close to 40% of households are materially deprived, and 23.4% of the population is at risk of poverty. Inequality remains higher than in benchmark countries. Many regions and groups, such as Roma and Egyptians, have limited access to infrastructure. Only 58.5% of Albanians living in rural areas have access to drinking water and 15% to sewerage services. Skills gaps affect young people’s chances of finding quality jobs, and the Albanian labour market faces structural challenges. Family responsibilities, discouragement and lack of access to child care prevent women’s equal participation in the formal labour market. The under-resourced health system places a high cost burden on patients, many of whom have no insurance. While many promising social protection reforms have recently been undertaken, social assistance benefits are too modest and need to be integrated with care services.

Aided by the introduction of a gender quota in 2008, female representation in politics has moved halfway towards the SDG target of equality. There remains room for improvement in the areas of gender discrimination in the family, safety and preference for male children. The People section in Chapter 5 identifies five major bottlenecks to well-being (Table 3.1).

Figure 3.4. People – progress towards the SDGs in Albania

Table 3.1. People – five major constraints to leaving no one behind in Albania
1. Remote Albanian regions are left behind in terms of employment opportunities and access to services, and local authorities’ capacity is low.
2. Lack of skills and weak labour market institutions result in low employment inclusiveness, particularly for women and young people.
3. The healthcare sector places a high cost burden on patients, many of whom have no insurance.
4. Healthcare governance needs more resources in terms of medical staff, dynamic management and infrastructure.
5. Many promising social protection reforms have recently been undertaken, but social assistance benefits are too modest and need to be integrated with care services.

Prosperity: economic development has been strong and has translated into higher standards of living; new drivers of transformation and job creation must be developed to continue this dynamic. While the overall labour market remains challenging, Albania has succeeded in increasing employment rates and reducing informal employment. Investments in infrastructure have extended access to electricity to the entire Albanian population, and broadband coverage has increased to 80% of the population (Figure 3.5). To create more jobs, boost productivity and increase investment, Albania would benefit from upgrading its domestic productive capacities, creating a flexible and skilled labour force, removing institutional and administrative barriers to domestic and foreign investment, and addressing the existing infrastructure gaps, especially in the transport and energy sectors. The Prosperity section in Chapter 5 identifies five major bottlenecks to a more dynamic path (Table 3.2).

Figure 3.5. Prosperity – progress towards the SDGs in Albania

Table 3.2. Prosperity – five major constraints to a more dynamic economy of Albania
1. Albania needs new growth drivers to accelerate the structural transformation of the economy and to boost productivity.
2. The tradable sector needs more investment, diversification and upgrading.
3. Lack of skills affects growth and productivity.
4. Institutional and administrative barriers limit domestic and foreign investment.
5. The large infrastructure gap deters investment, especially large manufacturing foreign direct investment (FDI).

Partnerships and financing: the double hit of the November 2019 earthquake and the COVID-19 pandemic require considerable fiscal responses that in turn will need a strong fiscal system, with more contributions from all Albanians. The necessarily increasing fiscal burden will put pressure on the already sizeable public debt and require well-targeted and efficient public spending. Albania’s current revenue from taxes is too low to support the necessary effort (Figure 3.6). A more dynamic economic path and more willingness by everyone to contribute to the state are necessary. In terms of access to financing, the entry of foreign financial institutions into the Albanian market enabled wider, better and cheaper conditions. However, more is needed. The Partnerships and financing section in Chapter 5 identifies three major bottlenecks to more sustainable financing (Table 3.3).

Figure 3.6. Partnerships and financing – progress towards the SDGs in Albania

Table 3.3. Partnerships and financing – three major constraints to an effective fiscal response to the 2019 earthquake and COVID-19 in Albania
1. The fiscal space is limited.
2. Revenue performance is lagging behind, while expenditures need to increase in key areas.
3. Access to financing is limited.

Peace and institutions: Albania has made remarkable progress in transitioning to democracy and a market economy. Strengthening trust in formal institutions will be key going forward. The country has become safer, and homicide rates have decreased, from 43 to 2 per 100 000 inhabitants between 1997 and 2018 (Figure 3.7). The recent ambitious judicial reforms and the rationalisation of the subnational government structure, if successfully concluded, could lay the foundations for more reliable and efficient services. The government has also improved powers and tools to combat corruption, one of the country’s most deeply rooted constraints to development. At the same time, informal practices and networks retain a significant role, often to the detriment of overall efficiency and the rule of law. In the past, patronage has led to the proliferation of ministries, authorities and agencies, each with their own agendas and priorities. Despite recent reforms that have streamlined the structure of the public administration, the multiplicity of actors could make a shared strategic vision and its implementation difficult. Property rights remain a challenge. The Peace and institutions section in Chapter 5 identifies six major constraints to more effective public institutions and services (Table 3.4).

Figure 3.7. Peace and institutions – progress towards the SDGs in Albania

Table 3.4. Peace and institutions – six major constraints to more effective public institutions and services in Albania
1. The fragmented structure of the public administration can stand in the way of implementation.
2. Courts lack capacity and are exposed to external influence.
3. Land property rights remain complex, affecting land productivity and sustainability.
4. Corruption remains a challenge.
5. Limited local fiscal and administrative capacity and an unclear regional development framework may exacerbate regional inequalities.
6. Statistical capacity is limited, especially in the area of planning and reporting on economic indicators.

Planet: Albania has made progress on improving drinking water and reducing air pollution, but pressures on sustainability and environmental quality of life continue to present challenges (Figure 3.8). The share of the population using safely managed sources of drinking water has increased from 49.3% to 70% since 2000, but many Albanians living in rural areas remain disadvantaged in coverage. The country’s annual exposure to particulate matter (PM) 2.5 decreased from 22 µg/m³ in 2005 to 18.2 µg/m³ in 2017, which is the best value in the region, but air pollution continues to pose a significant challenge, especially in Tirana. Albania is a small economy that relies on extensive use of natural resources, especially water, which is relevant for the energy, agriculture and tourism sectors. Minimising environmental degradation and improving resource preservation, as emphasised in the National Strategy for Development and Integration 2014-2020, is needed and will be key for making Albania’s growth more sustainable and for enhancing the well-being and the quality of life of all Albanians (Republic of Albania Council of Ministers, 2013[1]). The Planet section in Chapter 5 identifies three major constraints to a more sustainable path (Table 3.5).

Figure 3.8. Planet – progress towards the SDGs in Albania

Table 3.5. Planet – three major constraints to a more sustainable development of Albania
1. Albania is exposed and vulnerable to natural hazards.
2. Deterioration of the environmental quality of life remains a challenge.
3. The expansion of hydropower plants has a detrimental impact on the country’s environment and water resources, and other renewable energy sources are underdeveloped.

Suggestions for strategic priorities for Albania

A development strategy for Albania should set the path for achieving a vision for the future, address the most important constraints and build on opportunities. The suggestions for a vision and the major constraints presented above can build the basis for setting strategic priorities. The objectives of the vision statement must be paired with corresponding obstacles and pathways to building implementation capacities and political support. The strategic priorities identified build on other assessments in Albania, including the Voluntary National Review on Sustainable Development Goals of Albania (Republic of Albania Council of Ministers, 2018[29]), the National Strategy for Development and Integration 2019-2020 (NSDI II) (Republic of Albania Council of Ministers, 2013[1]), OECD assessments (OECD, 2018[30]) and the European Commission assessments (European Commission, 2019[31]; European Commission, 2019[32]) and aim to bring the key constraints together in a holistic manner.

The process of integration with the European Union is one of the key assets and strategic opportunities for Albania’s development. The process has been an important driver of reforms and institution building in Albania and has provided the country with large financial and technical support for its development and regional integration, as well as market access and economic opportunity (Box 3.3). As part of the integration process, Albania has worked to bring its legislation in line with the existing body of EU laws and standards (known as the acquis), helping set the basis for effective institutions and processes. The strategic importance of EU accession is clearly stated in key policy documents, such as Albania’s successive economic reform programmes (ERPs). The recent elevation of the process towards negotiations for membership is a significant step forward and a recognition of Albania’s reform progress. The following suggestions for strategic priorities should be considered against the backdrop of EU integration.

The COVID-19 crisis has had an impact on Albania but also offers the opportunity for strategic focus. Albania has dealt well with the health crisis and has been able to limit casualties and the spread of the virus. Like most countries in Europe, however, Albania will suffer a recession in 2020. In response, Albania will have to invest in a swift recovery. These investments and the potential international support present an opportunity for strategic focus on opportunities and on removing identified constraints.

Skills and education emerged as the top strategic priority, constituting both a key constraint and an opportunity. Albanians strongly desire a better education system. Workshop participants converged on a strong education system as the most important dimension of a future vision. At the same time, the analysis of both the people and the prosperity dimensions highlighted the deep insufficiencies in the current skills base and skills system as key constraints. Enabling Albanians to realise their potential should be a strategic objective for both greater well-being and a stronger economy.

Creating dynamic drivers of growth that generate opportunities and revenue must be a second priority. The constraints analysis and the visioning workshop highlight the desire and need for more economic opportunity from new activities that make the most of future opportunities, such as digitalisation, green growth and manufacturing and services more broadly. This requires identifying key opportunities and creating the best conditions for them to emerge. It also requires working with all the subregions and municipalities to identify economic opportunity and ensure that it materialises. The objective must be to stimulate the creation of quality jobs and generate the revenue necessary for solid public services, social protection and environmental quality of life.

Improving the quality of life and the environment for all citizens completes the priorities for Albania. The vision statement emphasises quality of life as an important future expectation. Making Albania an attractive place to live will make it an attractive place to visit and to invest in. To improve well-being, health care and social protection need to be strengthened and better financed. Albania’s natural environment is a key resource but must be much better protected. The rapid concentration of the population in urban centres over the last years has left many regions behind. Supporting regions to focus on strengths and ensuring good living conditions will be important. Special attention must be given to allowing women to participate fully as citizens and professionals, with the same opportunities and on an equal footing with men.

Institutional and government shortcomings emerged as the key obstacle that Albania’s future strategy should consider. Visioning workshop participants identified the lack of implementation of strategies and plans and the lack of institutional resilience as the most important challenges. The constraints assessment of this report identified as a challenge the somewhat fragmented structure of the public administration (in particular, the multitude of agencies) that often stands in the way of implementation and strategic clarity. Informal practices and networks retain a significant role, often to the detriment of overall efficiency and the rule of law. Local governments play a crucial role in service delivery but have little capacity. Last, land rights and property certainty are not yet fully assured everywhere.

Addressing these governance shortcomings and strengthening the government’s capability to deliver will have significant positive effects across Albania’s strategic objectives. The government and the public administration must play central roles in driving reforms to realise Albania’s development objectives. It will be important to build capacities within the public administration. For skills and education, stronger local governments (the top strategic priority), a more efficient administrative structure and a focus on quality staff will be key. Albania’s favourable pupil/teacher ratio could be better leveraged to boost Albanians’ skills and competences. For drivers of growth (the second strategic priority), institutional barriers and an unconducive business environment need improvement. Health care and social protection need both stronger local governments and more revenue. Both could be improved by streamlining the public administration, focusing on effectiveness and improving multilevel governance.

Managing regional integration, natural hazards and migration are key requirements for any future strategy. As a small economy with a large share of its population living abroad, Albania must strive for more integration into and collaboration across all policy areas with its regional neighbours and beyond. Stronger integration can boost the emergence of new drivers of growth. It is also necessary for addressing the many environmental challenges, most importantly energy production and diversification but also air pollution and water management. Migration is a key feature of many economies in the region. Albania has put in place the National Strategy for Migration 2019-2022 and National Strategy for Diaspora 2021-2025, which set out important directions to ensure effective migration governance, link migration with development, regulate flows and make the most of remittances, and create links with the diaspora. At the same time, state institutions have started to co-ordinate to manage human and financial resources abroad better. This is an important step forward, and the implementation of this strategy should continue to be part of Albania’s overall strategic objectives.

Box 3.3. Albania’s integration towards the European Union

The process towards integration with the European Union has been an important driver of democratisation and institution building in Albania and has provided the country with large financial and technical support for its development and regional integration. As part of the process, Albania has worked to bring its legislation in line with the existing body of EU acquis.

Through the Stabilisation and Association Process (SAP) since 1999, Albania and the economies in the region have been involved in a progressive partnership with the European Union. The SAP rests on the following pillars: bilateral Stabilisation and Association Agreements; trade relations (wide-ranging trade agreements); financial assistance (the Instrument for Pre-accession Assistance [IPA]); and regional co-operation, such as the Central European Free Trade Agreement (CEFTA):

The Stabilisation and Association Agreement with Albania, which entered into force on 1 April 2009, governs the relations between Albania and the European Union. The agreement offers various benefits to citizens and business (such as visa-free travel), supporting institutional and democratic reforms, and encouraging neighbourly relations and trade (European Commission, 2020[33]).
The IPA has been instrumental in providing Albania assistance in reforms through financial and technical help. IPA II (for 2014-20) accounted for 5.3% of GDP in Albania (EUR 639.5 million) (Figure 3.9 – Panel A), making Albania recipient of the fourth largest IPA in the Western Balkans in terms of share of GDP. Most of the IPA II funds in the period (53.7%, or about EUR 342.5 million) have been allocated towards strengthening democracy and governance, and rule of law and fundamental rights (Figure 3.9 – Panel B).

Figure 3.9. IPA II funding has been concentrated on democracy and governance, and rule of law and fundamental rights

Regional co-operation has been another important driver in the SAP for developing infrastructure and networks in the region and for establishing a free trade area between Albania and other economies. Key regional initiatives include the CEFTA, the Energy Community, the Western Balkans Investment Framework and the Regional Cooperation Council. The CEFTA, an international trade agreement among economies in South East Europe, was one means of facilitating trade in the region and of harmonising trade-related legislation with the European Union. The share of exports from Albania to CEFTA economies in the Western Balkans increased from 1% in 2012 to 16.5% in 2019. Only Montenegro has a larger share (Figure 3.10). In 2019, 61.5% of Albanian exports went to Kosovo (CEFTA, 2020[35]).

Figure 3.10. The role of the CEFTA in Albania

Considering Albania’s progress in implementing political and economic reforms, the European Council approved Albania’s candidacy status in 2014 (European Parliament, 2019[36]). Good progress was noted in establishing functioning parliamentary procedures, adopting amendments to the electoral code, implementing public administration reform, combating corruption in the judiciary and facilitating business entry into the market, among other areas. Despite the fulfilment of conditions necessary to start accession negotiations by 2019, the process was put on hold, as EU leaders did not reach a decision to open accession negotiations with Albania and North Macedonia at the European Council summit in October 2019.

At the Zagreb EU-Western Balkans Video-Summit of 6 May 2020, EU leaders reaffirmed their support for the European perspective of the Western Balkans. The European Commission presented its proposals for the negotiating framework in July 2020 (European Commission, 2020[37]) and reported on the implementation of reforms in Albania and North Macedonia (European Commission, 2020[38]; European Commission, 2020[39]; European Commission, 2020[40]). For Albania, the European Council listed a number of conditions to be met prior to its first Inter-Governmental Conference, including among others: adopting the electoral reform fully in accordance with the recommendations of the Organization for Security and Co-operation in Europe/Office for Democratic Institutions and Human Rights; ensuring transparent financing of political parties and electoral campaigns; ensuring the continued implementation of the judicial reform; and finalising the establishment of the anti-corruption and organised crime specialised structures (European Commission, 2020[39]).

The new Enlargement Package and the adoption of the Economic and Investment Plan have set new directions for EU integration and recovery from COVID-19. Building on the Western Balkan strategy from 2018 (European Commission, 2018[41]), the Enlargement Package adopted on 6 October 2020 stresses the need to improve the EU integration process to be better equipped to deal with structural weaknesses in Albania and other Western Balkan economies. In parallel, the European Commission adopted the Economic and Investment Plan to spur the long-term economic recovery of Albania and the region, support a green and digital transition and foster regional integration into and convergence with the European Union. The support is crucial, especially in light of both the COVID-19 impact and the existing challenges, such as weak competitiveness and high unemployment. The plan will mobilise up to EUR 9 billion of IPA III funding for 2021-27. A large majority of this support will be directed towards key productive investments and sustainable infrastructure in the Western Balkans through the ten flagship initiatives. Through the Western Balkans Guarantee facility, the ambition is to raise additional investments of up to EUR 20 billion (European Commission, 2020[39]; European Commission, 2020[40]).

Note: The ten flagship investment initiatives are: two transport infrastructure projects (connecting east to west and north to south), renewable energy, transition from coal, connecting coastal regions, building renovations, waste and water management, digital infrastructure, supporting the competitiveness of the private sector, and youth support.

Source: European Commission (2020[33]; 2020[38]; 2020[39]; 2020[40]; 2020[37]); (European Commission, 2018[41]); (CEFTA, 2020[35]).

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Note

← 1. See Table 1.1. in the Regional Overview for more detail on the choice of comparable economies.

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